AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 2002
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. __)
CPI AEROSTRUCTURES, INC.
(Name of Small Business Issuer in its Charter)
New York 3728 11-2520310
---------- ------------------ -----------------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
200A Executive Drive, Edgewood, New York 11717
(631) 586-5200
(Address and telephone number of principal executive offices)
Arthur August, Chairman and Chief Executive Officer
CPI Aerostructures, Inc.
200A Executive Drive
Edgewood, New York 11717
(631) 586-5200
(Name, Address and Telephone Number of Agent for Service)
Copy to:
David Alan Miller, Esq.
Graubard Miller
600 Third Avenue
New York, NY 10016
Telephone: (212) 818-8800
Facsimile (212) 682-2320
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis under Rule 415 under the Securities Act of 1933, as
amended, check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------- ------------------ ------------------------------- --------------------------- --------------------
Title of Each Amount
Class of Securities To Be Proposed Maximum Proposed Maximum Amount of
To Be Registered Registered Offering Price Per Security(1) Aggregate Offering Price Registration Fee
---------------- ---------- -------------- ------------ ------------------------ ----------------
-------------------------------- ------------------ ------------------------------- --------------------------- --------------------
Common Shares, $.001 1,840,000(2) $5.375 $9,890,000 $909.88
Par value
Representative's Warrant 1 $100.000 $100 --(3)
Common Shares Underlying 160,000 $5.913 $946,080 $87.04
Representative's Warrant
-------------------------------- ------------------ ------------------------------- --------------------------- --------------------
Total Amount Due $996.92
-------------------------------- ------------------ ------------------------------- --------------------------- --------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
(2) Includes 240,000 common shares that the underwriters have the option to
purchase to cover over-allotments, it any.
(3) No fee pursuant to Rule 457(g).
(4) Issuable upon the exercise of Representative's Warrant. Pursuant to Rule
416, there are also being registered additional securities as may be
required for issuance pursuant to the anti-dilutive provisions of the
warrant.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 13, 2002
PROSPECTUS
1,600,000 Common Shares
CPI AEROSTRUCTURES, INC.
We are offering for sale 1,600,000 of our common shares on a
firm-commitment basis. We have granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase a
maximum of 240,000 additional common shares from us within 45 days following the
date of this prospectus to cover over-allotments, if any, under certain
circumstances.
Our common shares are listed on the American Stock Exchange under the
symbol "CVU". The last reported sale price of our common shares on the AMEX on
________ __, 2003, was $_________ per share.
------------------
Investing in our common shares involves a high degree of risk. See "Risk
Factors" beginning on page 8 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
Underwriting Proceeds,
Public discount and before
offering price commissions expenses, to us
-------------- ----------- ---------------
Per common share........... $ $ $
Total............. $ $ $
EarlyBirdCapital, Inc., on behalf of the underwriters, expects to deliver
the shares to purchasers on or about ______ __, 2003.
EarlyBirdCapital, Inc.
________ __, 2003
Table of Contents
Summary........................................................................3
Risk Factors...................................................................8
Use of Proceeds...............................................................12
Capitalization................................................................13
Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................14
Business......................................................................18
Management....................................................................24
Principal Shareholders........................................................28
Description of Our Capital Shares.............................................29
Underwriting..................................................................32
Legal Matters.................................................................33
Experts.......................................................................33
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................................33
Where You Can Find Additional Information.....................................34
Index to Financial Statements.................................................35
--------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
jurisdiction where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of this prospectus.
2
Summary
This summary highlights certain information appearing elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before purchasing our common shares. Unless
otherwise stated in this prospectus, references to "we," "us," "our" or "CPI"
refer to CPI Aerostructures, Inc. Unless otherwise stated, all financial
information contained in the prospectus does not include the discontinued
operations of our subsidiary, Kolar, Inc., and assumes that the underwriters
will not exercise their option to purchase an additional 240,000 shares.
General
CPI Aerostructures, Inc. is engaged in the contract production of
structural aircraft parts principally for the United States Air Force and other
branches of the U.S. armed forces. We also provide aircraft parts to the
commercial sector of the aircraft industry but, due to the soft global economy,
we believe that significantly weaker business prospects exist in this sector.
Our strategy for growth includes de-emphasizing our commercial operations and
concentrating on government and military sales. In 2001 and for the nine months
ended September 30, 2002, substantially all of our revenues were derived from
government contract sales.
We operate as a "mini-prime" contractor supplying structural aircraft parts
under prime contracts with several branches of the U.S. Government. In that
capacity, we deliver skin panels, leading edges, flight control surfaces, engine
components, wing tips, cowl doors, nacelle assemblies and inlet assemblies for
military aircraft such as the C-5A "Galaxy" cargo jet, the T-38 "Talon" jet
trainer, the C-130 "Hercules" cargo jet, the A-10 "Thunderbolt" or "Warthog"
attack jet and the E-3 "Sentry" AWACS jet. We also supply commercial aircraft
products including aprons and engine mounts, which attach jet engine housing to
aircraft such as the Lear 60 and Astra Galaxy business jets. Our products are
sub-assemblies, a series of parts fixed together to form a larger unit that will
comprise a part of a complex aerodynamic structure. In conjunction with our
assembly operations, we provide engineering, technical and program management
services to our customers.
Due to budget constraints in the mid to late 1990's, the Clinton
Administration closed several military installations and began outsourcing the
assembly of component parts into subassemblies. Until then, the military had
performed this function internally. The ability to manage the bidding process,
subcontract production of components and assemble components into subassemblies
is our core competency and the government's decision to outsource this function
has resulted in increased business opportunities for us. Fueled by new defense
contract awards, our revenue has grown significantly over the past few years.
Our revenue growth has averaged 45% per annum since 1997. From 1997 through
2001, the dollar value of defense contracts awarded to us has increased at a
compounded annual growth rate of 59%.
Most members of our management team have held management positions at large
defense contractors, including Grumman, Lockheed and Fairchild. Our competitive
advantage lies in our ability to offer large contractor capabilities with the
flexibility and responsiveness of a small company, while staying competitive in
cost and delivering superior quality products. While the larger prime
contractors compete for significant modification awards and subcontract
components to other suppliers, they generally do not compete for awards for
smaller modifications or spares and repair parts, even for planes for which they
are the original manufacturer. We also qualify as a small business because we
have less than 1,000 employees, and this allows us to compete on military awards
set aside for companies with this small business status.
While historically the majority of our contracts have been valued below
$200,000, we have recently competed for, and were awarded, significantly larger
contracts, including an estimated $61 million award for the T-38 "Talon" jet
trainer. We intend to continue to bid on these larger contracts. We believe that
our improved financial condition as a result of this offering and our success
with the T-38 program will allow us to compete more effectively for larger
awards in the future.
Corporate Information
CPI was incorporated under the laws of the State of New York in January
1980 under the name Composite Products International, Inc. CPI changed its name
to Consortium of Precision Industries, Inc. in April 1989 and then to CPI
Aerostructures, Inc. in July 1992.
Our principal office is located at 200A Executive Drive, Edgewood, New York
11717 and our telephone number is (631) 586-5200.
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Discontinued Operations
In 1997, in an effort to diversify our business, we acquired Kolar Machine,
Inc., a manufacturer of precision machined parts for the electronics industry.
As a result of the downturn in the electronic manufacturing sector, we
terminated Kolar's operations in December 2001, closed its Ithaca facility and
liquidated most of its assets through an auction in February 2002. As a result
of our decision to close the Kolar facilities and liquidate its assets, Kolar's
operations have been classified as "discontinued."
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The Offering
Securities offered....................... 1,600,000 common shares
Shares outstanding at
December 13, 2002........................ 2,785,668
Shares to be outstanding
after the offering....................... 4,385,668
Use of proceeds.......................... We intend to use the net proceeds
of this offering, expected to be
approximately $_______, for
repayment of approximately $6
million of debt and for working
capital and other general corporate
purposes.
American Stock Exchange Symbol........... CVU
Except as set forth in the financial statements or as otherwise specifically
stated, all information in this prospectus assumes:
o No exercise of the underwriters' over-allotment option to purchase up to
240,000 shares of our common shares;
o No exercise of the representative's warrant to purchase up to 160,000
shares of our common shares;
o No exercise of options granted under our stock option plans, under which
there are an aggregate of 1,470,146 of our common shares reserved for
issuance, and options to purchase 1,222,338 common shares outstanding at
exercise prices from $1.20 to $8.46.
o No exercise of warrants to purchase 37,088 of our common shares granted
outside of our option plans, at exercise prices from $1.65 to $4.50 per
share; and
o No conversion of a $4.0 million principal amount promissory note,
convertible into 333,334 common shares.
Risks
As part of your evaluation of us, you should take into account not only our
business approach and strategy, but also the special risks we face in our
business. Because our business is substantially dependent upon contracts with
the U.S. government, we are subject to a number of risks. Some of these risks
are: the government's ability to terminate their contracts with us at any time;
the government's ability to reduce or modify its contracts if its requirements
or budgetary constraints change; the government's right to suspend or debar us
from doing business with them; and competition in the bidding process for
government contracts.
5
Summary Financial Information
The summary historical financial information presented below for the years
ended December 31, 2000 and 2001, have been derived from our audited
consolidated financial statements and notes included elsewhere in this
prospectus, which have been reclassified to reflect the operations of Kolar,
Inc., as discontinued operations. The summary historical financial information
for the nine month periods ended September 30, 2001 and 2002, have been derived
from our unaudited consolidated financial statements and notes included
elsewhere in this prospectus, which have been reclassified to reflect the
operations of Kolar as discontinued operations. In our opinion the unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments, which
consist of only normal recurring adjustments, necessary for a fair presentation
of the results of operations for the periods presented.
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included elsewhere in this prospectus.
Fiscal Year Ended Nine Months Ended
---------------------------------------- ----------------------------------------
December 31, 2000 December 31, 2001 September 30, 2001 September 30, 2002
----------------- ----------------- ------------------ ------------------
Statement of Operations Data:
Revenues $8,261,351 $15,024,027 $10,631,858 $17,988,748
Cost of sales 5,676,229 10,955,264 7,015,993 12,549,892
------------- ------------- -------------- -------------
Gross profit 2,585,122 4,068,763 3,615,965 5,438,856
G&A expenses 1,421,758 1,479,421 1,145,607 1,800,641
------------- ------------- -------------- -------------
Income (loss) from operations 1,163,364 2,589,342 2,470,358 3,638,215
Other income (expense), net (233,428) (1,620) (9,223) 3,642
Interest expense 106,157 (155,825) (126,707) (318,965)
------------- ------------- -------------- -------------
Total other income (339,585) (157,445) (135,935) (315,323)
Income (loss) before taxes 823,779 2,431,897 2,334,428 3,322,982
Provision (benefit) for income taxes (126,000) 0 0 (529,000)
------------- ------------- -------------- -------------
Net income (loss) from continuing operations 949,779 2,431,897 2,334,428 2,793,892
Net income (loss) from discontinued operations 979,427 (14,070,018) (2,505,481) 0
------------- ------------- -------------- -------------
Net income (loss) $1,929,206 ($11,638,119) ($171,053) $2,793,892
============= ============= ============== =============
Basic and Diluted Income (loss) per Share:
Actual and Pro Forma:
Income (loss) per share from continuing $0.36 $0.92 $0.88 $1.03
operations
Income (loss) per share from 0.37 (5.31) (0.94) 0
discontinued operations ------------- ------------- -------------- -------------
Income (loss) per share outstanding $0.73 ($4.39) ($0.06) $1.03
============= ============= =============== =============
Weighted average common share outstanding 2,648,509 2,653,538 2,652,355 2,700,785
============= ============= =============== =============
Other Financial Data:
Capital expenditures $70,837 $19,307 $14,507 $40,011
Depreciation and amortization 30,194 35,653 26,355 12,373
The information for September 30, 2002 includes income taxes computed at an
effective tax rate of 15.9% because we estimate we will utilize $800,000 of our
net operating loss carryforward.
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The following table summarizes our balance sheet information as of December
31, 2001 and as of September 30, 2002.
The proforma information gives effect to:
o Reduction of the principal and interest owed under a $4.0 million
principal amount convertible promissory note held by Ralok, Inc. which
we have the right to purchase for $2.7 million. As of September 30,
2002, there was $996,650 of interest accrued on the note. Ralok is the
entity from which we purchased the assets of Kolar Machine, Inc.; and
o The sale of our properties in Ithaca, New York, which is expected to
close in the first quarter of 2003, for approximately $860,000.
The pro forma as adjusted information gives further effect to our receipt
of estimated net proceeds of $________ from the sale of our common shares being
offered pursuant to this prospectus.
December 31, 2001 September 30, 2002
----------------- ------------------------------------------------------
Pro Forma
Actual Actual Pro Forma (as adjusted)
------ ------ --------- -------------
Balance Sheet Data:
Working capital (deficit) (2,807,657) 266,304 3,146,304
Total assets 13,830,697 14,035,432 13,755,432
Total liabilities 16,184,868 13,479,562 10,319,562
Shareholders' equity (deficit) (2,354,171) 555,870 3,343,870
7
Risk Factors
Before making an investment in our common shares, you should consider
carefully the following risk factors described below, as well as the other
information appearing in this prospectus, including the financial statements and
related notes.
Risks Related to Our Business
We depend on government contracts for most of our revenues.
We are a supplier, either directly or as a subcontractor, to the U.S.
government and its agencies, principally the U.S. Air Force. The percentage of
our revenues that came from U.S. government contracts in 2000 and 2001 was
approximately 75% and 92%, respectively. We depend on these government contracts
for most of our business. If we are suspended or debarred from contracting with
the U.S. government, if our reputation or relationship with individual federal
agencies were impaired, or if the government otherwise ceased doing business
with us or significantly decreased the amount of business it does with us, our
business, prospects, financial condition and operating results would be
materially adversely affected.
We face risks relating to government contracts.
There are inherent risks in contracting with the U.S. government, including
risks that are peculiar to the defense industry, which could have a material
adverse effect on our business, prospects, financial condition and operating
results. All contracts with the U.S. government contain provisions and are
subject to laws and regulations that give the government rights and remedies not
typically found in commercial contracts, including rights that allow the
government to:
o terminate contracts for convenience in whole or in part at any time;
o reduce or modify contracts or subcontracts if its requirements or
budgetary constraints change;
o cancel multi-year contracts and related orders if funds for contract
performance for any subsequent year become unavailable;
o adjust contract costs and fees on the basis of audits completed by its
agencies;
o claim rights in products and systems produced by us;
o suspend or debar us from doing business with U.S. government; and
o control or prohibit the export of our products.
If the U.S. government terminates a contract for convenience, we may
recover only our incurred or committed costs, settlement expenses and profit on
work completed prior to the termination. If the government terminates a contract
for default, we may not recover even those amounts, and instead may be liable
for excess costs incurred by the government in procuring undelivered items and
services from another source.
We have risks associated with competing in the bidding process for U.S.
government contracts.
We obtain many of our U.S. government contracts through a competitive
bidding process. In the bid process, we face the following risks:
o We must bid on programs in advance of their completion, which may
result in unforeseen technological difficulties or cost overruns;
o We must devote substantial time and effort to prepare bids and
proposals for competitively awarded contracts that may not be awarded
to us; and
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o Awarded contracts may not generate sales sufficient to result in
profitability.
We are subject to strict governmental regulations relating to the environment
which could result in fines and remediation expense in the event of
non-compliance.
We are required to comply with extensive and frequently changing
environmental regulations at the federal, state and local levels. Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution, to protect against occupational exposure to chemicals,
including health and safety risks, and to require notification or reporting of
the storage, use and release of certain hazardous substances into the
environment. This extensive regulatory framework imposes significant compliance
burdens and risks on us. In addition, these regulations may impose liability for
the cost of removal or remediation of certain hazardous substances released on
or in our facilities without regard to whether we knew of, or caused, the
release of such substances. Furthermore, we are required to provide a place of
employment that is free from recognized and preventable hazards that are likely
to cause serious physical harm to employees, provide notice to employees
regarding the presence of hazardous chemicals and to train employees in the use
of such substances. Our operations require the use of a limited amount of
chemicals and other materials for painting and cleaning that are classified
under applicable laws as hazardous chemicals and substances. If we are found not
to be in compliance with any of these rules, regulations or permits, we may be
subject to fines, remediation expenses and the obligation to change our business
practice, any of which could result in substantial costs that would adversely
impact our business operations and financial condition.
We may be subject to fines and disqualification for non-compliance with Federal
Aviation Administration regulations.
We are subject to regulation by the Federal Aviation Administration under
the provisions of the Federal Aviation Act of 1958, as amended. The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components. We are subject to inspections by the FAA and may be subjected to
fines and other penalties (including orders to cease production) for
noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations.
We had a shareholders' deficit and working capital deficit for December 31,
2001.
At December 31, 2001, we had a shareholders' deficit (i.e., the amount by
which liabilities exceed assets) of approximately $2.3 million. We also had
negative working capital (the amount by which current liabilities exceed current
assets) of $2,807,657 at December 31, 2001. These types of deficits indicate
that we may not be able to pay our debts as they become due. There can be no
assurance that we will not experience such deficits again in the future.
We do not have sufficient resources available to repay our debt in full, and
there can be no assurance that we will raise sufficient funds in this offering
or find replacement capital, or that additional arrangements can be made to
restructure the terms of the debt.
We currently owe several banks approximately $2,866,055 in principal
amount, payable monthly, with a final payment due on June 30, 2003, bearing
interest at the prime rate plus 3.5% per annum, and $250,743 in principal
amount, payable monthly, with a final payment due on September 30, 2007, bearing
interest at the rate of 8.3% per annum. The debt is secured by all of CPI's and
Kolar's assets. We also owe $4,000,000 in principal amount to Ralok plus accrued
interest of $1,063,494 as of November 30, 2002, which is due on September 30,
2003, unless the maturity date of the bank loans is extended, in which case the
Ralok note will mature ninety days after the extended maturity date of the bank
loans, but not later than September 30, 2007. This note bears interest at the
rate of 8% per annum. We intend to raise up to $___ million in this offering to
reduce the bank loans and purchase the Ralok note. There can be no assurance
that we will raise enough proceeds in this offering to repay our debt, and if we
do not, we may not be able to make additional arrangements to restructure the
terms of the debt or to find replacement capital, to repay our debt. If we do
not repay our debt when due, the banks will be entitled to foreclose on their
security interest and sell our assets.
Our debt facilities contain restrictive covenants which may adversely affect us.
The debt facilities contain restrictive covenants which, among other
things, restrict us from:
o incurring additional debt;
o incurring liens;
9
o paying dividends;
o making certain other restricted payments or investments;
o consummating certain asset sales;
o entering into certain transactions with affiliates; and
o merging or consolidating with another entity.
The debt facilities also require us to maintain specified financial ratios
and satisfy certain financial tests. Our ability to meet the financial ratios
and tests may be affected by events beyond our control. A breach of any of these
covenants could result in an event of default under the debt facilities. If an
event of default occurs, the lenders are permitted to accelerate the debt and
demand repayment in full. If we do not repay our debt when due, the banks will
be entitled to foreclose on their security interest and sell our assets. In that
event, our assets subject to the security interest could be sold, and we might
have to curtail our operations.
If the contracts associated with our backlog were terminated, our financial
condition would be adversely affected.
The maximum contract value specified under each government contract that we
enter into is not necessarily indicative of the revenues that we will realize
under that contract. Because we may not receive the full amount we expect under
a contract, we may not accurately estimate our backlog because the actual
accrual of revenues on programs included in backlog may never occur or may
change. Cancellations of pending contracts or terminations or reductions of
contracts in progress could have a material adverse effect on our business,
prospects, financial condition or results of operations.
We may be unable to retain personnel who are key to our operations.
Our success, among other things, is dependent on our ability to attract and
retain highly qualified senior officers and engineers. Competition for key
personnel is intense. Our ability to attract and retain senior officers and
experienced, top rate engineers is dependent on a number of factors, including
prevailing market conditions and compensation packages offered by companies
competing for the same talent. The inability to hire and retain these persons
may adversely affect our production operations and other aspects of our
business.
Risks related to the offering
The market price of our common shares is highly volatile.
The market price of our common shares has been highly volatile and may
continue to be volatile in the future. As a result of our share price
volatility, it is difficult to determine the true market value of our company.
Investors in this offering may experience dilution upon the exercise of options
and warrants.
We currently have outstanding options and warrants to purchase 1,259,426 of
our common shares. There are 247,808 common shares available under our existing
equity performance plans that may be subject to future awards. Upon consummation
of this offering, the representative of the underwriters will be issued a
warrant to purchase up to 160,000 common shares. Investors in this offering may
experience a reduction in percentage ownership of the company and dilution in
the net tangible book value of their investment upon the exercise of these
outstanding options and warrants and any we may issue in the future.
10
There could be substantial sales of our common shares after the expiration of
lock-up periods, which could cause the price of our common shares to fall.
After the offering, 4,385,668 of our common shares will be outstanding. Of
the common shares outstanding after the offering, the resale of 314,652 shares
will be restricted under lock-up agreements that restrict the holders' ability
to transfer our shares for 24 months after the date of this prospectus, except
that the representative has agreed that Mr. Arthur August may adopt a plan under
Rule 10b5-1 of the Securities Exchange Act of 1934, pursuant to which he can
sell up to _______ of his common shares per month during this 24-month period.
Most of the remaining outstanding shares may be sold freely without restriction.
Our underwriters may in their sole discretion waive or permit us to waive the
lock-up at any time for any shareholder. Moreover, all of the shares underlying
our outstanding options have been registered and may be sold freely immediately
after they are exercised. Sales of a substantial number of our common shares
could cause the price of our securities to fall. Additionally, these sales could
impair our ability to raise capital by selling additional securities.
Provisions of our certificate of incorporation, by-laws and New York laws may
prevent a change in control even if such change of control would result in an
increase in our share price.
New York law. We are subject to Section 912 of the New York Business
Corporation Law. In general, Section 912 prohibits a publicly held New York
corporation from engaging in a business combination with an interested
shareholder (a person who owns, or within five years did own, 20% or more of the
corporation's voting shares) for a period of five years after the date of the
transaction in which the person became an interested shareholder unless, prior
to such date, the corporation's board of directors approved either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder.
Certificate of incorporation and bylaws. Our certificate of incorporation
provides for a board of directors divided into three classes, each of which
generally serves for a term of three years, with only one class of directors
being elected each year. A shareholder entitled to vote for the election of
directors may nominate a person or persons for election as director only if
written notice of such shareholder's intent to make such nomination is given to
our secretary not later than 120 days in advance of the meeting. Our certificate
of incorporation and by-laws do not provide for cumulative voting rights. This
means that holders of a majority of our capital shares who vote in the election
of directors can elect all of the directors and, in such event, the holders of
the remaining shares will not be able to elect any of our directors.
Our certificate of incorporation provides that shareholder actions by
consent require the consent of all of our shareholders. This has the effect of
delaying the ability of a majority shareholder to acquire control of our board
of directors.
We are authorized to issue up to 5,000,000 preferred shares. These shares
may be issued in one or more series and our board of directors may determine the
terms of any shares of newly issued preferred shares at the time of issuance,
without further shareholder action. These terms may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions. Any issuance of our preferred shares, depending upon the rights,
preferences and designations of these shares, may delay, deter or prevent a
change in control of our company, or could result in the dilution of the voting
power of any of our common shares you purchase in the offering. We have no
present plans to issue any preferred shares.
Forward-Looking Statements
This prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
our financial condition, results of operations and business. The words
"anticipate," "believe," "estimate," "expect," "plan," "intend" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. We
cannot assure you that any of our expectations will be realized. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, without limitation, our ability to service
our debt or to obtain financing, our ability to win government contract awards
and to attract and retain a sufficient revenue-generating customer base, and
general economic conditions.
11
Use of Proceeds
We expect the net proceeds of this offering to be approximately $________.
If the underwriters exercise their right to purchase an additional 240,000
shares, the net proceeds will be $________. These estimates assume that the
public offering price is $________ per share. We compute net proceeds by
deducting the underwriting discount and our estimated offering expenses from the
total offering price.
We intend to use the net proceeds of this offering as follows:
o $2.7 million to purchase a note held by Ralok, Inc. in the principal
amount of $4 million, which is currently accruing interest at the rate
of 8% per annum and matures on September 30, 2003;
o repayment of approximately $3.3 million in principal amount of bank
loans, of which $2,866,055 bears interest at the prime rate plus 3.5%
per annum and matures on June 30, 2003; and $250,473 bears interest at
a rate of 8.3% per annum and matures on September 30, 2007; and
o approximately $________ for working capital.
Our agreement with the banks obligates us to use the net proceeds of this
offering to pay the bank loans in full. In November 2002, we entered into an
agreement with Ralok that grants us the right to purchase the Ralok note,
including all principal and accrued interest, for an aggregate purchase price of
$2.7 million, at any time until April 30, 2003. We are obligated to purchase the
Ralok note if the net proceeds of this offering are at least $4 million.
Unforeseen events, unexpected expenses, delays and other matters may make
it necessary to reallocate or revise the anticipated uses and amounts set forth
above. Although there are no current plans to do so, our board of directors
reserves the right, in the exercise of its business judgment, to alter the
estimates and anticipated uses set forth herein.
12
Capitalization
The following table sets forth our cash and capitalization:
o on an actual basis as of September 30, 2002;
o on a pro forma basis reflecting:
o the reduction of the principal and interest owed under a $4.0
million principal amount convertible promissory note held by
Ralok, Inc., which we have the right to purchase the note for
$2.7 million. As of September 30, 2002, there was $996,650 of
interest accrued on the note;
o the sale of our properties in Ithaca, New York, which are
expected to close in the first quarter of 2003, for approximately
$860,000;
o on an as adjusted basis reflecting the sale of common shares in this
offering.
You should read this table in conjunction with the financial statements
beginning on page F-1 of this prospectus.
September 30, 2002
-------------------------------------------------------------
Pro forma
Actual Pro forma as adjusted
------ --------- -----------
Cash, cash equivalents and short-term investments $ 121,002 $ 121,002
Property and equipment, net 110,340 110,340
Total assets 13,745,866 13,465,868
=========== ==========
Liabilities and shareholders' equity:
Debt and capital lease obligations: 2
Note payable-Seller 4,898,035 2,700,000
Capital lease obligations (including current portion) 127,904 127,904
----------- ----------
Debt and capital lease obligations 5,025,939 2,827,904 0
----------- ---------- ---------
Shareholders' equity (deficit):
Common shares--$.001 par value, authorized 50,000,000
shares, issued and outstanding 2,735,670; preferred
shares, authorized 5,000,000 shares, none issued and
outstanding 2,736 2,736
Additional paid-in-capital 12,483,092 12,483,092
Accumulated deficit (11,929,958) (9,109,958) 0
----------- ---------- ---------
Total shareholders' equity 555,870 3,375,870 0
----------- ---------- ---------
Total capitalization 5,581,809 6,203,774 0
=========== ========== =========
13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the financial information set forth below in conjunction
with our financial statements beginning on page F-1. Except as otherwise
indicated, the following discussion does not include the results of operations
of Kolar, Inc., which have been reclassified as discontinued operations.
Critical Accounting Policies
Revenue Recognition
We recognize revenue from our contracts over the contractual period under
the percentage-of-completion (POC) method of accounting. Under the POC method of
accounting, sales and gross profit are recognized as work is performed based on
the relationship between actual costs incurred and total estimated costs at the
completion of the contract. Recognized revenues that will not be billed under
the terms of the contract until a later date are recorded as an asset captioned
"Costs and estimated earnings in excess of billings on uncompleted contracts."
Contracts where billings to date have exceeded recognized revenues are recorded
as a liability captioned "Billings in excess of costs and estimated earnings on
uncompleted contracts." Changes to the original estimates may be required during
the life of the contract. Estimates are reviewed monthly and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period the change becomes known. The use of the POC method
of accounting involves considerable use of estimates in determining revenues,
costs and profits and in assigning the amounts to accounting periods. We
continually evaluate all of the issues related to the assumptions, risks and
uncertainties inherent with the application of the POC method of accounting.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. We record a valuation allowance that represents federal
and state operating loss carryforwards for which utilization is uncertain.
Management judgment is required in determining our provision for income taxes,
deferred tax assets and liabilities and the valuation allowance recorded against
our net deferred tax assets. The valuation allowance would need to be adjusted
in the event future taxable income is materially different than amounts
estimated. We have recorded valuation allowances of $4,487,000 and $2,074,000
against our deferred tax assets at September 30, 2002 and December 31, 2001,
respectively.
Results of Operations
Nine Months Ended September 30, 2002 as Compared to the Nine Months Ended
September 30, 2001
Revenue. Our revenue for the nine months ended September 30, 2002 was
$17,988,748 compared to $10,631,958 for the same period last year, representing
an increase of $7,356,790 or 69%.
Gross profit. Gross profit for the nine months ended September 30, 2002 was
$5,438,856, compared to $3,615,965 for the same period last year, an increase of
$1,822,891 or 50%. Gross profit as a percentage of revenue for the nine months
ended September 30, 2002 was 30% compared to 34% for the same period last year
due primarily to a less profitable sales mix.
Selling, general and administrative expenses. Selling, general, and
administrative expenses for the nine months ended September 30, 2002 were
$1,800,641, compared to $1,145,607 for the same period last year, an increase of
$655,034, or 57%. This increase is largely due to legal fees associated with the
discontinuance of Kolar's operations and restructuring our existing debt.
Interest expense for the nine months ended September 30, 2002 was $318,965,
compared to $126,707 for the same period last year, an increase of $192,258, or
151%. The increase in interest expense results from the fact that interest for
the previous year was included in Kolar's income (loss) from operations prior to
discontinuance of Kolar's operations.
Income from continuing operations. Income from continuing operations for
the nine months ended September 30, 2002 was $3,638,215 compared to $2,470,358
from continuing operations for the same period last year, an increase of
$1,167,857, or 47%. The 2002 results include income taxes computed at an
effective tax rate of 15.9% because we estimate that we will utilize $800,000 of
14
our net operating loss carryforward. Basic income per share was $1.03 on an
average of 2,700,785 shares outstanding, compared to $.53 per share from
continuing operations on an average of 2,652,355 shares outstanding for the nine
months ended September 30, 2001.
Year Ended December 31, 2001 as Compared to the Year Ended December 31,
2000
Revenue. Our revenue for the year ended December 31, 2001 was $15,024,027
compared to $8,261,351 for the year ended December 31, 2000, representing an
increase of $6,762,676, or 82%.
Gross profit. Gross profit for 2001 was $4,068,763 compared to $2,585,122
for 2000, representing an increase of $1,483,641. Gross profit as a percentage
of revenue for 2001 was 27%, compared to 31% for 2000. The reduction in gross
profit percentage is due primarily to a less profitable sales mix.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 2001 were $1,479,421 compared to $1,421,758 for
2000, representing an increase of $57,663. This increase is primarily
attributable to the increased level of sales. Selling, general and
administrative expenses as a percentage of revenue for 2001 and 2000 were 10%
and 17%, respectively. Interest expense for 2001 was $155,825, compared to
$106,157 for 2000, representing an increase of $49,668.
Income from continuing operations. Net income from continuing operations
was $2,431,897 for 2001 compared to $949,779 for 2000, representing an increase
of $1,482,118, or 156%.
Including the operations of our discontinued Kolar subsidiary, the net loss
for 2001 was $11,638,119 compared to net income of $1,929,206 for 2000,
representing a decrease in net income of $13,567,325, which was primarily due to
the liquidation of Kolar. Basic loss per share was $4.39 on 2,653,538 average
shares outstanding compared to net income of $0.73 on 2,648,509 average shares
outstanding for fiscal 2000.
Anticipated Results of Operations for Year Ended December 31, 2002 as
Compared to Year Ended December 31, 2001
Although we do not expect our revenue for the fourth quarter 2002 will be
as large as it was for the third quarter 2002, we expect that revenue will be in
excess of $23 million for the year ending December 31, 2002, compared to
$15,024,027 for the year ended December 31, 2001, representing an increase of
approximately $8.0 million, or approximately 53%. Because we expect to utilize
approximately $1,600,000 million of our net operating loss carryforward, we
expect basic earnings per share for the year to be in excess of $1.40.
Liquidity and Capital Resources
General
At September 30, 2002 we had working capital of $266,304 compared to a
deficiency of $2,807,657 at December 31, 2001, an increase of $3,073,961. This
increase is primarily attributable to an increase in costs and estimated
earnings in excess of billings on uncompleted contracts of approximately
$3,250,000.
Net cash used in operating activities for the nine months ended September
30, 2002 was $74,762. This decrease in cash was primarily the result of cash
being used for new contracts of $3,247,461.
Financing Arrangements
At December 31, 2001, Kolar was in default under its debt facilities with
JPMorgan Chase Bank (formerly known as Chase Manhattan Bank) and GE Capital CFE,
Inc. (as assignee of Mellon Bank, N.A.) and its convertible note with Ralok,
Inc. The debt was guaranteed by CPI and secured by all of CPI and Kolar's
assets. In December 2001, we discontinued Kolar's operations and began the
process of liquidating its assets. The proceeds from the auction of Kolar's
machinery and equipment and the sale of its real estate are being used to pay a
portion of the debt owed to the bank lenders. The proceeds of the sales,
however, are not sufficient to provide for payment in full of all of Kolar's
bank debt. In 2002, we issued an aggregate of 70,000 of our common shares to
Chemical Investments, Inc. (as designee of JPMorgan Chase) and 20,000 common
shares to GE Capital CFE, Inc. (as designee of Mellon Bank, N.A.) as
15
consideration for their agreement to extend the due date of the loan and for
their services in connection with amending the loan documents.
In June 2002, CPI restructured the debt with the banks and Ralok. As
restructured, we currently owe the banks approximately $2,866,055 in principal
amount bearing interest at the prime rate plus 3.5% per annum, with a final
payment due on June 30, 2003, and $250,473 in principal amount bearing interest
at the rate of 8.3% per annum, with a final payment due on September 30, 2007.
Additionally, we agreed that if any portion of the loans currently held by
GECapital CFE, Inc. in the principal amount of approximately $1,012,926 are not
repaid or refinanced in their entirety by the dates set forth below, we would
pay loan fees in the following amounts:
o On or before September 30, 2002, a fee of $25,000;
o on or before December 31, 2002, a fee of $50,000;
o on or before March 31, 2003, a fee of $100,000; and
o on or before June 30, 2003, a fee of $150,000.
We paid the $25,000 fee on September 30, 2002. Our agreement with the banks
also obligated us to use the net proceeds of this offering first to pay the bank
loans in full.
We also amended the $4,000,000 principal amount convertible promissory note
held by Ralok, which bears interest at a rate of 8% per annum and which was
originally due on June 30, 2002. As amended, the note will mature on September
30, 2003, unless the maturity date of the bank loans is extended, in which case
the Ralok note will mature 90 days after the extended maturity date of the bank
loans, but not later than September 30, 2007. The Ralok note is secured by a
security interest in all of our assets and that is subordinate to the security
interest of the bank lenders. The principal amount of the note is currently
convertible, at Ralok's option, into 333,334 of our common shares. Pursuant to
the terms of the subordination agreement between the bank lenders and Ralok,
Ralok is prohibited from receiving current payments of interest on its note.
Until repaid, it will continue to accrue interest, which will be compounded
monthly and paid at maturity together with the principal amount. As of November
30, 2002, there was $1,063,494 of accrued interest on the note. In November
2002, we entered into an agreement with Ralok which grants us the right to
purchase the Ralok note, including all principal and accrued interest, at any
time until April 30, 2003, for an aggregate purchase price of $2.7 million. If
the net proceeds of this offering are at least $4 million, we are obligated to
purchase the Ralok note.
We intend to raise $___ million in this offering to repay the bank loans
and purchase the Ralok note. We intend to repay our debt in full with the
proceeds of this offering and obtain a credit line for working capital on terms
more favorable to us than our existing bank loans. There can be no assurance
that we will raise enough proceeds in this offering to repay our debt, and if we
do not, we may not be able to make additional arrangements to restructure the
terms of the debt or to find replacement capital.
Upon successful completion of this offering and repayment of our
outstanding debt, we believe our resources will be sufficient to meet our
current working capital needs for at least the next 12 months.
In September 2002, we engaged a broker/dealer to act as placement agent to
raise money for us on a private placement basis. In October 2002, we, together
with the placement agent, met with several investors to discuss the prospect of
raising approximately $7.5 million through a private offering of our common
shares. The proceeds of the private placement would have been used for the same
purposes that we intend to use the proceeds of this offering. On October 25,
2002, we terminated our relationship with this broker/dealer and abandoned our
private placement efforts. No offers to buy or indications of interest from
investors were ever accepted. This prospectus supersedes any materials that may
have been given to prospective investors in connection with the private
placement.
16
The table below summarizes information about our contractual obligations as
of September 30, 2002 and the effects these obligations are expected to have on
our liquidity and cash flow in the future years.
--------------------------------------------- --------------------------------------------------------------------------------------
Contractual Obligations Payments Due By Period ($)
--------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
--------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
Short-Term Debt 8,213,167 8,006,046 117,739 89,382 0
--------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
Capital Lease Obligations 127,904 127,904 0 0 0
--------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
Operating Leases 0 0 0 0 0
--------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
Total Contractual Cash Obligations 8,341,071 8,133,950 117,739 89,382 0
--------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
Inflation
Inflation has historically not had a material effect on our operations.
17
Business
General
CPI Aerostructures, Inc. is engaged in the contract production of
structural aircraft parts principally for the United States Air Force and other
branches of the U.S. armed forces. We also provide aircraft parts to the
commercial sector of the aircraft industry but, due to the soft global economy,
we believe that significantly weaker business prospects exist in this sector.
Our strategy for growth includes de-emphasizing our commercial operations and
concentrating on government and military sales. In 2001 and for the nine months
ended September 30, 2002, substantially all of our revenues were derived from
government contract sales.
We operate as a "mini-prime" contractor supplying structural aircraft parts
under prime contracts with several branches of the U.S. Government. In that
capacity, we deliver skin panels, leading edges, flight control surfaces, engine
components, wing tips, cowl doors, nacelle assemblies and inlet assemblies for
military aircraft such as the C-5A "Galaxy" cargo jet, the T-38 "Talon" jet
trainer, the C-130 "Hercules" cargo jet, the A-10 "Thunderbolt" or "Warthog"
attack jet and the E-3 "Sentry" AWACS jet. We also supply commercial aircraft
products including aprons and engine mounts, which attach jet engine housing to
aircraft such as the Lear 60 and Astra Galaxy business jets. Our products are
sub-assemblies, a series of parts fixed together to form a larger unit that will
comprise a part of a complex aerodynamic structure. In conjunction with our
assembly operations, we provide engineering, technical and program management
services to our customers.
Due to budget constraints in the mid to late 1990's, the Clinton
Administration closed several military installations and as a result began
outsourcing many functions, including the assembly of aircraft structural
component parts into subassemblies. Until then, the military had performed this
function internally. The ability to manage the bidding process, subcontract
production of components and assemble components into subassemblies is our core
competency and the government's decision to outsource this function has resulted
in increased business opportunities for us. Fueled by new defense contract
awards, our revenue has grown significantly over the past few years. Our revenue
growth has averaged 45% per annum since 1997. From 1997 through 2001, the dollar
value of defense contracts awarded to us has increased at a compounded annual
growth rate of 59%.
Most members of our management team have held management positions at large
defense contractors, including Grumman, Lockheed and Fairchild. Our competitive
advantage lies in our ability to offer large contractor capabilities with the
flexibility and responsiveness of a small company, while staying competitive in
cost and delivering superior quality products. While the larger prime
contractors compete for significant modification awards and subcontract
components to other suppliers, they generally do not compete for awards for
smaller modifications or spares and repair parts, even for planes for which they
are the original manufacturer. We also qualify as a small business because we
have less than 1,000 employees, and this allows us to compete on military awards
set aside for companies with this small business status.
While historically the majority of our contracts are valued below $200,000
we have recently competed for, and were awarded, significantly larger contracts,
including an estimated $61 million award for the T-38 "Talon" jet trainer. We
intend to continue to bid on these larger contracts. We believe that our
improved financial condition as a result of this offering and our success with
the T-38 program will allow us to compete more effectively for larger awards in
the future.
Significant Contracts
The ongoing maintenance of existing aircraft by the U.S. Air Force is the
primary driver of our growth in both the number of contracts and the size of
awards. Our contracts with the Air Force accounted for substantially all of our
revenue for 2001 and for the nine months ended September 30, 2002. In most cases
the contracts relate to an aircraft that is no longer being manufactured and is
required to be maintained for a number of years. CPI has been awarded contracts
within these maintenance programs on the C-5A, T-38 and E-3 aircraft. The
following are current Department of Defense (DOD) budget amounts for 2003
program spending on these aircraft:
18
Aircraft 2003 Program Spending *
-------- -----------------------
C-5A $363,803,000
T-38 $168,112,000
E-3 $ 29,478,000
* Source: Department of Defense
The C-5A "Galaxy" cargo jet is one of the largest aircraft in the world and
can carry a maximum cargo load of 270,000 pounds. Lockheed delivered the first
C-5A in 1970. The C-5A Galaxy carries fully equipped combat-ready military units
to any point in the world on short notice and then provides field support to
sustain the fighting force. The Air Force has created a comprehensive program to
ensure the capabilities of its C-5A fleet until 2040. We are one of the leading
suppliers of structural spare parts and assemblies for the C-5A aircraft. We
assemble numerous C-5A parts, including panels, slats, spoilers and wing-tips
and are the only supplier of C-5A wing-tips to the U.S. government. Like the
C-5A itself, the wing-tip is a large structure and is expensive -- up to
$750,000 for each replacement piece. Our first C-5A contract was $589,908 of
structural spares and was awarded in 1995. Since then we have received awards
aggregating approximately $36 million.
The T-38 "Talon" is a twin-engine, high-altitude, supersonic jet primarily
used for pilot training. The Talon first flew in 1959. More than 1,100 were
delivered to the Air Force between 1961 and 1972, when production ended. There
are approximately 500 T-38's in active service with the Air Force. The Air Force
has a program designed to extend the structural life of the T-38 until 2020. In
2001, we were awarded a ten-year contract to build the structural inlets for the
T-38 Propulsion Modification Program. The T-38 contract is the largest in our
history, worth an estimated $61 million over the ten-year life of the program.
The length and size of this program allow us to develop a long-term backlog and
establish ourselves as a successful prime contractor for larger and longer term
programs.
The E-3 "Sentry" is an airborne warning and control systems (AWACS)
aircraft that provides all-weather surveillance, command, control and
communications to the U.S., NATO and other allied air defense forces. The E-3 is
used primarily by the United States and NATO to detect, identify and track
airborne enemy forces. It is the premier air battle command and control aircraft
in the world today. Boeing delivered the first E-3 in 1977 and there are
approximately 30 E-3 aircraft in active service with the Air Force. We currently
have contract awards on the E-3 aggregating approximately $4.9 million. We make
nose cowlings, skin panels and pan, rod, brace and seal assemblies for the E-3.
Sales and Marketing
We obtain military contracts for our products and services through the
process of competitive bidding. While historically the majority of our contracts
have been valued below $200,000, we have successfully competed for and have been
awarded significantly larger contracts. Our average sales cycle, which generally
commences at the time a prospective customer issues a request for proposal and
ends upon execution of a contract with the customer, typically ranges from six
months to one year.
We use third party service providers to help locate small government
contracts that are regularly posted by the various defense logistic agencies.
The service providers screen contracts according to the criteria set by us and
forward matching contracts to us. We then view the relevant contracts directly
on the government websites and choose the contracts on which we will bid. We
generally bid on 40 to 50 contracts per week. Over the past 3 years, we have
been awarded approximately 10% of the contracts on which we have bid.
We qualify for small business status because we have less than 1,000
employees. Currently, the military is required to allocate 23% of procurement
contracts to companies with this small business status. The military's Fiscal
Year 2002 program goals for small business prime contracting were 23%, with 40%
for subcontracting. Approximately 20% of the value of our current contracts were
awarded to us under this program.
The U.S. Air Force operates three Air Logistics Centers (ALC) through which
it purchases all structural replacement and modification parts. Each ALC is
located on a domestic Air Force base and is responsible for the repair and
modification of different aircraft. Parts worn out through the normal course of
operation and discarded instead of repaired are ordered through the centralized
Defense Supply Center Richmond (DSCR). We use on-site consultants at each ALC
and the DSCR to help in the procurement process. They are important as
relationship managers and typically have previous experience on the procurement
side. The consultants provide feed back and keep us alerted to large contracts
19
that might be on the horizon. Additionally, we signed agreements with a number
of sales representatives to market our products to a broader base of customers.
The Market
During most of the 1990's, defense spending was basically flat or
experienced a slight decline. In contrast, the defense budget in the current
decade has been increasing. The 2001 budget proposal for the Department of
Defense was for $277.5 billion, with actual outlays of $296.3 billion. The 2002
proposal was for $310.5 billion, which was amended and increased by $18.4
billion to bring the total 2002 Department of Defense budget to $328.9. The Bush
Administration's 2003 budget proposal is $369 billion. Of the various branches
of the military, the Air Force budget would rise the most in 2003, by 12.7%, to
$107 billion. According to DoD budget documents, U.S. defense spending is
projected to increase steadily in the next five years, eventually reaching
$451.4 billion in 2007.
The amount spent by the U.S. Air Force for aircraft procurement was
approximately $9.9 billion in 2001 and $10.493 billion in 2002. The Air Force is
estimating it will spend over $12.067 billion for aircraft procurement in 2003.
Procurement includes the acquisition of new aircraft, aircraft modification
programs, and spending on spare and repair parts. Extensive modification
programs are being implemented to increase the service life of aircraft, as some
are no longer being newly manufactured. As aging aircraft are being maintained,
support for aging aircraft, including spare parts and assemblies, is also
required. The chart below breaks down the $12.067 million estimated to be spent
by the U.S. Air Force in 2003 for aircraft modification programs, spare and
repair parts, support and procurement of new aircraft.
2003 Air Force Procurement Budget
($ in Millions)
Aircraft: 9267.4
Modification of Inservice Aircraft: 1776.6
Support: 747.4
Spare and Repair Parts: 276
Source: Department of Defense
Backlog
We produce custom sub-assemblies pursuant to long-term contracts and
customer purchase orders. Backlog consists of aggregate values under such
contracts and purchase orders, excluding the portion previously included in
operating revenues on the basis of percentage of completion accounting, and
including estimates of future contract price escalation. Substantially all of
our backlog is subject to termination at will and rescheduling, without
significant penalty. Congress often appropriates funds for a particular program
or contract on a yearly or quarterly basis, even though the contract may call
for performance that is expected to take a number of years. Therefore, our
funded backlog does not include the full value of our contracts because Congress
often appropriates funds for a particular program or contract on a yearly or
quarterly basis, even though the contract may call for performance that is
expected to take a number of years. Our backlog as of December 31, 2001 and
December 31, 2002, is as follows:
20
Backlog December 31, 2001 December 31, 2002
------- ------------------------ ---------------------
Funded 12,904,661
Unfunded 57,043,935
----------
Total 69,948,596
Of the total amount of our backlog at December 31, 2001, approximately 95%
was attributable to military contracts. Approximately $18.7 million (89%) of the
backlog at December 31, 2001 was scheduled for delivery during 2002.
Material and Parts
We subcontract production of substantially all component parts incorporated
into our products to third party manufacturers under firm fixed price orders.
Our decision to purchase certain components generally is based upon whether the
components are available to meet required specifications and at a cost and
delivery consistent with customer requirements. From time to time, we are
required to purchase custom made parts from sole suppliers and manufacturers in
order to meet specific customer requirements. To date, we have not experienced
material delays in connection with obtaining custom parts and we believe that
the loss of any single supplier or manufacturer would not have a material
adverse effect on our business.
We obtain our raw materials from several commercial sources. Although
certain items are only available from limited sources of supply, we believe that
the loss of any single supplier would not have a materially adverse effect on
our business.
Competition
The markets for our products are highly competitive. We compete with
numerous larger, well-established prime contractors engaged in the supply of
aircraft parts and assemblies to the military, including Grumman, Lockheed,
Boeing, Nordam, and Vaught. All of these competitors possess significantly
larger infrastructures, greater resources, and the capabilities to respond to
much larger contracts. We also compete against smaller contractors such as
Aerocomponents, Aerospace Engineering and Support, GSE Dynamics, Honeycomb
Company of America, Alton Iron Works, B&B Devices, and Precision Manufacturing.
Most members of our management team have held management positions at large
defense contractors, including Grumman, Lockheed and Fairchild. Our competitive
advantage lies in our ability to offer large contractor capabilities with the
flexibility and responsiveness of a small company, while staying competitive in
cost and delivering superior quality products. While the larger prime
contractors compete for significant modification awards and subcontract
components to other suppliers, they generally do not compete for awards in
smaller modifications, spares and repair parts, even for planes for which they
are the original manufacturer. We believe we compete effectively against the
smaller competitors because our smaller competitors generally do not have the
expertise we have in responding to RFPs for government contracts.
We qualify as a small business because we have less than 1,000 employees.
Currently, the military is required to allocate 23% of procurement contracts to
prime contractors that have this small business status. The military's Fiscal
Year 2002 program goals for small business prime contracting are 23%, with 40%
for subcontracting. Approximately 20% of the value of our current contracts were
awarded under this program.
21
Government Regulation
Environmental Regulation
We are subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with Federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on us. Governmental authorities
have the power to enforce compliance with these regulations and to obtain
injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA) imposes strict, joint and several liability on the present and
former owners and operators of facilities that release hazardous substances into
the environment. The Resource Conservation and Recovery Act of 1976 (RCRA)
regulates the generation, transportation, treatment, storage and disposal of
hazardous waste. In New York, the handling, storage and disposal of hazardous
substances is governed by the Environmental Conservation Law, which contains the
New York counterparts of CERCLA and RCRA. In addition, the Occupational Safety
and Health Act, which requires employers to provide a place of employment that
is free from recognized and preventable hazards that are likely to cause serious
physical harm to employees, obligates employers to provide notice to employees
regarding the presence of hazardous chemicals and to train employees in the use
of such substances.
Our operations require the use of a limited amount of chemicals and other
materials for painting and cleaning, including solvents and thinners, that are
classified under applicable laws as hazardous chemicals and substances. We have
obtained a permit from the Town of Islip, New York, Building Division in order
to maintain a paint booth containing flammable liquids.
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration under
the provisions of the Federal Aviation Act of 1958, as amended. The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components. We are subject to inspections by the FAA and may be subjected to
fines and other penalties (including orders to cease production) for
noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination or our disqualification from some of
our contracts, which could have a material adverse effect on our operations.
Government Contract Compliance
Our government contracts are subject to the procurement rules and
regulations of the United States government. Many of the contract terms are
dictated by these rules and regulations. During and after the fulfillment of a
government contract, we may be audited in respect of the direct and allocated
indirect costs attributed thereto. These audits may result in adjustments to our
contract costs. Additionally, we may be subject to U.S. government inquires and
investigations because of our participation in government procurement. Any
inquiry or investigation can result in fines or limitations on our ability to
continue to bid for government contracts and fulfill existing contracts.
We believe that we are in substantial compliance with all federal, state
and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operations of our business.
Insurance
We maintain a $2 million general liability insurance policy, a $10 million
products liability insurance policy, and a $5 million umbrella liability
insurance policy. We believe this coverage is adequate for the types of products
presently marketed because of the strict inspection standards imposed on us by
our customers before they take possession of our products. Additionally, the
Federal Acquisition Regulations generally provide that we will not be held
liable for any loss of or damage to property of the government that occurs after
the government accepts delivery of our products and that results from any
defects or deficiencies in our products unless the liability results from
willful misconduct or lack of good faith on the part of our managerial
personnel.
22
Proprietary Information
None of our current assembly processes or products are protected by
patents. We rely on proprietary know-how and confidential information and employ
various methods to protect the processes, concepts, ideas and documentation
associated with our products. These methods, however, may not afford complete
protection and there can be no assurance that others will not independently
develop such processes, concepts, ideas and documentation.
Property
CPI Aerostructures' executive offices and production facilities are
situated in an approximate 35,000 square foot building located at 200A Executive
Drive, Edgewood, New York 11717. CPI Aerostructures occupies this facility under
a five year lease which commenced in August 2002. The current monthly base rent
is $19,144, plus common area costs. We believe that our facilities are adequate
for our current needs.
Kolar, Inc., closed all its facilities located in Ithaca, New York. Kolar
is currently in the process of selling these properties through private sales.
Employees
As of December 13, 2002, CPI had 45 full-time employees.
We employ temporary personnel with specialized disciplines on an as-needed
basis. None of our employees are members of unions. We believe that our
relations with our employees are good.
23
Management
Set forth below is certain information concerning each of our directors and
executive officers:
Name Age Position
Arthur August.......... 67 Chairman of the Board of Directors, Chief
Executive Officer and Director
Edward J. Fred......... 44 President, Chief Financial Officer,
Secretary and Director
Walter Paulick......... 56 Director
Kenneth McSweeney...... 71 Director
__________________..... __ Director*
* Mr. _________________'s directorship will be effective upon consummation of
the offering.
Arthur August, one of our founders, has been the chairman of the board,
chief executive officer and a director since January 1980 and was our president
until December 31, 2001. From 1956 to 1979, Mr. August was employed by Grumman
Corporation where he last held the position of deputy director. Mr. August holds
a certificate in Aeronautical Design from the Academy of Aeronautics, a Bachelor
of Science degree in Industrial Management from C. W. Post College, a Masters
degree in Engineering from New York University and is a graduate of the Program
for Management Development at the Harvard Graduate School of Business.
Edward J. Fred has been an officer since February 1995. He was our
controller from February 1995 to April 1998, when he was appointed as chief
financial officer. He was executive vice president from May 1, 2000 until
December 31, 2001 and was appointed to the position of president on January 1,
2002. He has also been our secretary and a director since January 1999. For
approximately ten years prior to joining our company, Mr. Fred served in various
positions for the international division of Grumman, where he last held the
position of controller. Mr. Fred holds a Bachelor of Business Administration in
Accounting from Dowling College and an Executive MBA from Hofstra University.
Walter Paulick has been a director since April 1992. Mr. Paulick is
currently a self-employed financial consultant. From 1982 to November 1992, Mr.
Paulick was a vice president of Parr Development Company, Inc., a real estate
development company. From 1980 to 1982, Mr. Paulick was employed by Key Bank,
where he last held the position of vice president. From 1971 to 1980, Mr.
Paulick was a vice president of National Westminster U.S.A. Mr. Paulick holds an
associate degree in Applied Science from Suffolk Community College and Bachelor
of Business Administration from Dowling College.
Kenneth McSweeney has been a director since February 1998. Mr. McSweeney
has been an independent consultant to the aerospace industry since January 1995.
From 1961 to 1995, Mr. McSweeney served in various management positions for
Grumman, most recently as the vice president of its Aerostructures Division and
a director of business development for the Mideast and gulf coast region. Mr.
McSweeney has extensive experience in aerostructures and logistics support
products and is a licensed professional engineer in New York State. He holds
Bachelor and Master of Science Degrees in Electrical Engineering from the
Polytechnic Institute of Brooklyn and a Masters Degree in Business Management
from CW Post College. He also completed the Executive Development Program at the
Cornell School of Business and Public Administration.
______________ will become a director upon consummation of the offering.
Board of Directors
Our board of directors is divided into three classes with only one class of
directors being elected in each year and each class serving a three-year term.
The term of office of the first class of directors (Class I), consisting of
Kenneth McSweeney, will expire at our annual meeting in 2005. The term of office
of the second class of directors (Class II), consisting of Walter Paulick, will
expire at our annual meeting in 2003. The term of office of the third class of
directors (Class III), consisting of Arthur August and Edward J. Fred, will
24
expire at our annual meeting in 2004. We will propose that Mr. __________ be
placed in Class I at our Annual Meeting of Shareholders in 2003.
Currently, directors do not receive cash compensation for serving on our
board of directors, but they are reimbursed for the reasonable expenses they
incur in attending meetings. Messrs. Paulick and McSweeney, our two non-officer
directors, have each received stock options from us in consideration of their
service as directors and Mr. ___________ will be granted stock options upon
consummation of the offering.
Employment Agreements
Mr. August serves as our chairman of the board and chief executive officer
and Mr. Fred serves as our president, chief financial officer and secretary. Mr.
August's employment agreement expires on December 31, 2004 and Mr. Fred's
expires on December 31, 2005. Mr. August's annual base salary is currently
$300,000, but will decrease to $100,000 on January 1, 2003. From that date until
the end of the term, Mr. August is required to devote only such time to our
business as he, in his sole discretion, deems necessary. Mr. Fred's annual base
salary is currently $200,000 and will increase by 8% each January 1st during the
contract term. In addition to the base salary, Mr. August will receive a bonus
equal to 4% of our net income for the year ending December 31, 2002; 3% for the
year ending December 31, 2003; and 2% for the year ending December 31, 2004. Mr.
Fred will receive a bonus equal to 2% of our net income for the year ending
December 31, 2002; 3% for the year ending December 31, 2003; and 4% for the
years ending December 31, 2004 and 2005.
Mr. August agreed that he would not compete with us during the term of his
employment with us and for a period of five years thereafter. As consideration
for his agreement not to compete with us for an extended period of time, we
agreed to pay Mr. August $300,000 in five, equal annual installments of $60,000
commencing on the date of termination. Mr. Fred agreed not to compete with us
during the term of his employment and for two years thereafter.
Timothy Stone was appointed president of Kolar on July 10, 2000. Pursuant
to an employment agreement, which expires on April 30, 2003, Mr. Stone receives
an annual salary of $132,300. Mr. Stone is now overseeing the liquidation of
Kolar's assets.
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to us during the fiscal years ended December 31,
2002, 2001 and 2000, by our chief executive officer and our other executive
officers whose total compensation exceeded $100,000.
-------------------------- ---------------------- ------------------------ ----------------------- -------------------------
Long-Term Compensation
Securities Underlying
Name/Position Year Salary Bonus Options/SARs(#)
------------- ---- ------ ----- ---------------
Arthur August 2002 _________ __________ 85,000
Chief Executive Officer
2001 $303,180 -0- 100,000
2000 $307,854 $82,000 200,000
Edward J. Fred
President and Chief
Financial Officer 2002 _________ __________ 100,000
2001 $139,256 -0- 100,000
2000 $149,728 59,000 125,000
Timothy Stone(1) 2002 _________ -0- -0-
2001 $120,016 -0- -0-
-------------------------- ---------------------- ------------------------ ----------------------- -------------------------
--------------------------------
(1) Mr. Stone is now overseeing the liquidation of Kolar's assets and is no
longer deemed an executive officer of our company.
25
Option Grants in 2001
----------------------- -------------------------------- ------------------------------ ------------------- ----------------
Number of Securities Percent of Options Granted
Underlying Options Granted(#) to Employees in Fiscal Year(1) Exercise Price Expiration Date
----------------------------- -------------------------- ------------------ ----------------
($/SH)
Arthur August 100,000 44.4% $1.20 08/11
Edward J. Fred 100,000 44.4% $1.20 08/11
----------------------- -------------------------------- ------------------------------ ------------------- ----------------
--------------------------
(1) We granted a total of 225,000 options to employees in the fiscal year ended
December 31, 2001.
Option Grants in 2002
----------------------- -------------------------------- ------------------------------ ------------------- ----------------
Number of Securities Percent of Options Granted
Underlying Options Granted(#) to Employees in Fiscal Year(1) Exercise Price Expiration Date
----------------------------- -------------------------- ------------------ ----------------
($/SH)
Arthur August 85,000 __% $6.35 06/12
Edward J. Fred 100,000 __% $6.35 06/12
----------------------- -------------------------------- ------------------------------ ------------------- ----------------
--------------------------
(1) We granted a total of _______ options to employees in the fiscal year ended
December 31, 2002.
Aggregated Option Exercises and Option Values
-----------------------------------------------------------------------------------------------------------------------
Valute of Unexercised
Number of Unexercised In-The-Money Options
Shares Acquired Value Options Exercisable/ ($)Exercisable/
Name on Exercise (#) Realized Unexercisable Unexercisable
---- --------------- -------- ------------------------------------- --------------------------------------
December 31, 2001 September 30, 2002 December 31, 2001 September 30, 2002
----------------- ------------------ ----------------- ------------------
2002 2002
---- ----
Arthur August -0- -0- 496,585/1,750 533,334/0 $38,000/0 $1,456,450/0
Edward J. Fred -0- -0- 305,002/0 391,334/0 $38,000/0 $1,063,150/0
Timothy Stone -0- -0- 30,000/0 0/0 -0- $0/0
-----------------------------------------------------------------------------------------------------------------------
Employee Benefit Plans
In October 2000, we adopted the Greit Plan for the purpose of offering
senior management a deferred compensation death benefit plan that would provide
a tax-free benefit for senior management and which would be tax-neutral to us.
Pursuant to the plan, we made a non-interest bearing loan to Arthur August in
the amount of $150,000, which Mr. August used to purchase a Greit Plan. This
plan has since been terminated and the surrender value of the Greit Plan has
been returned to Mr. August. Mr. August has placed the proceeds from the
surrender value in an annuity in our name, which will appreciate to at least
$150,000 by September 2011 in order to repay the loan made to him. Mr. August
also assigned to us an insurance policy on his life in the amount of $150,000
and agreed to maintain it until the date upon which the annuity matures.
Accordingly, the loan to Mr. August will be repaid upon the maturity date of the
annuity or upon the death of Mr. August, whichever occurs first.
26
Stock Options
Performance Equity Plan 2000
The Performance Equity Plan 2000 authorizes the grant of 830,000 stock
options, stock appreciation rights, restricted stock, deferred stock, stock
reload options, and other stock based awards of which options to purchase an
aggregate of 715,000 common shares have been granted, at exercise prices ranging
from $1.20 to $6.35 per share. As of December 13, 2002, options to purchase
115,000 additional common shares remain available for grant.
1998 Performance Equity Plan
The 1998 Performance Equity Plan authorizes the grant of 463,334 stock
options, stock appreciation rights, restricted stock, deferred stock, stock
reload options, and other stock based awards of which options to purchase an
aggregate of 431,002 common shares have been granted, at exercise prices ranging
from $2.53 to $6.90 per share. As of December 13, 2002, options to purchase
2,332 additional common shares remain available for grant.
1995 Stock Option Plan
The 1995 Employee Stock Option Plan authorizes the grant of 200,000 stock
options and stock appreciation rights of which options to purchase an aggregate
of 9,667 common shares have been granted, at exercise prices ranging from $2.53
to $8.46 per share. As of December 13, 2002, options to purchase 155,476
additional common shares remain available for grant.
1992 Employee Stock Option Plan
The 1992 Employee Stock Option Plan authorized the grant of 83,334 options,
of which options to purchase 41,667 shares are outstanding at exercise prices
ranging from $2.59 to $6.27 per share. No more shares may be granted under this
plan.
Other Options
In April 1998, we issued warrants to purchase 33,334 common shares to
designees of Ladenburg Capital Management Inc. as compensation for certain
consulting services. The remaining unexercised warrants entitle the holders to
purchase 17,088 common shares at an exercise price of $4.50 through March 2003.
On December 31, 1999 and February 1, 2002, we granted to John Aneralla, the
stepson of Arthur August, five year non-plan options to purchase 15,000 and
5,000 common shares, respectively, as compensation for consulting services. The
exercise prices of the options are $2.53 and $1.65, respectively, the fair
market value of our common shares on the date of grant of the options.
Equity Compensation Plan Information
The following table sets forth certain information at December 31, 2002
with respect to our equity compensation plans that provide for the issuance of
options, warrants or rights to purchase our securities.
------------------------------------------------------------------------------------------------------------------------------------
Number of Securities
to be Issued upon Weighted-Average Number of Securities Remaining
Exercise of Exercise Price of Available for Future Issuance under
Outstanding Options, Outstanding Options, Equity Compensation Plans (excluding
Plan Category Warrants and Rights Warrants and Rights securities reflected in the first column)
------------- ------------------- ------------------- -----------------------------------------
Equity Compensation Plans Approved
by Security Holders __ $__ __
Equity Compensation Plans Not
Approved by Security Holders __(1) $__ __
------------------------------------------------------------------------------------------------------------------------------------
-------------------
(1) See "Stock Options - Other Options" description above.
27
Principal Shareholders
The table and accompanying footnotes set forth certain information as of
December 13, 2002, with respect to the ownership of our common shares by:
o each person or group who beneficially owns more than 5% of our common
shares;
o each of our directors,
o our chief executive officer and our other executive officers whose
total compensation exceeded $100,000 during the fiscal year ended
December 31, 2001, and
o all of our directors and executive officers as a group.
A person is deemed to be the beneficial owner of securities that can be
acquired by the person within 60 days from the record date upon the exercise of
warrants or options. Accordingly, common shares issuable upon exercise of
options and warrants that are currently exercisable or exercisable within 60
days of December 13, 2002 have been included in the table with respect to the
beneficial ownership of the person owning the options or warrants, but not with
respect to any other persons.
Percent of Common Shares
Name and Address Shares ------------------------
Of Beneficial Owner Beneficially Owned(1) Prior to the Offering(2) After the Offering
------------------- -------------------- ------------------------ ------------------
Arthur August(3) 838,518(4) 25.3% 17.0%
Edward J. Fred(3) 398,434(5) 12.5% 8.3%
Walter Paulick(3) 11,667(6) * *
Kenneth McSweeney(3) 15,001(7) * *
Daniel Liguori(8) 333,334(9) 10.7% *
All directors and executive 1,263,620(10) 33.8% 23.7%
Officers as a group (four persons)
----------------------------------------
* Less than 1%.
(1) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all common shares
beneficially owned by them, subject to community property laws, where
applicable.
(2) Based on 2,785,668 shares issued and outstanding.
(3) The business address of Messrs. August, Fred, Paulick and McSweeney is c/o
CPI Aerostructures, Inc., 200A Executive Drive, Edgewood, New York 11717.
(4) Includes 533,334 common shares that Mr. August has the right to acquire
upon exercise of options. Excludes an aggregate of 38,134 common shares and
options owned by Mr. August's children and 3,000 common shares owned by Mr.
August's wife, all of which shares Mr. August disclaims beneficial
ownership.
(5) Includes 398,334 common shares that Mr. Fred has the right to acquire upon
exercise of options.
(6) Represents common shares that Mr. Paulick has the right to acquire upon
exercise of options.
(7) Includes 11,667 common shares that Mr. McSweeney has the right to acquire
upon exercise of options.
(8) Mr. Liguori's address is 1001 Bay Road, #210C, Vero Beach, Florida 32963.
(9) Represents 333,334 common shares that Ralok, Inc. has the right to acquire
by converting the promissory note it received in connection with our
purchase of Kolar Machine, Inc. Mr. Liguori is the President of Ralok. We
intend to repurchase the note upon consummation of this offering.
(10) Includes an aggregate of 955,002 common shares that Messrs. August, Fred,
Paulick and McSweeney have the right to acquire upon exercise of
outstanding options.
28
Description of Our Capital Shares
Our certificate of incorporation authorizes us to issue 50,000,000 common
shares, par value $.001 per share, and 5,000,000 preferred shares, par value
$.001 per share. Immediately prior to this offering, 2,785,668 common shares
were issued and outstanding. Immediately after this offering, there will be
1,600,000 more common shares outstanding. If the underwriters elect to exercise
their over-allotment option, there will be an additional 240,000 shares
outstanding. No preferred shares are issued and outstanding.
Common Shares
You will be entitled to one vote per common share held by you on all
matters submitted to a vote of our shareholders. Holders of common shares have
no preemptive rights and have no rights to convert their common shares into any
other securities. In the event of our dissolution or liquidation or the
winding-up of our business, you will be entitled to share ratably with our other
common shareholders in all assets remaining after payment of all of our
liabilities, and subject to any preferential payments to the holders of any
preferred shares then outstanding. Although we are restricted from paying cash
dividends under the terms of the agreements governing our debt, holders of
common shares are entitled to receive ratably such dividends as may be declared
by our board of directors out of funds legally available therefor.
All of our outstanding common shares are, and when issued, the common
shares offered hereby will be, fully paid and nonassessable.
Preferred Shares
Subject to the provisions of our certificate of incorporation and to the
limitations prescribed by law, our board of directors has the authority, without
further action by our shareholders, to issue up to 5,000,000 shares of our
authorized but unissued preferred shares in or more series. Our board of
directors has the power and authority to fix the designations, preferences,
dividend, conversion, cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations and restrictions
any or all of which may be greater than the rights of our common shares. We have
no present plans to issue any preferred shares.
New York Law, Certificate of Incorporation and By-Law Provisions that May Have
an Anti-Takeover Effect
The following discussion concerns certain provisions of New York law and
our certificate of incorporation and by-laws that may delay, deter or prevent a
tender offer or takeover attempt that you might consider to be in your best
interest, including offers or attempts that might result in a premium being paid
to you over the market price of our securities.
New York law. We are subject to Section 912 of the New York Business
Corporation Law. In general, Section 912 prohibits a publicly held New York
corporation from engaging in a business combination with an interested
shareholder for a period of five years after the date of the transaction in
which the person became an interested shareholder unless, prior to such date,
the corporation's board of directors approved either the business combination or
the transaction which resulted in the shareholder becoming an interested
shareholder. A business combination includes a merger, asset sale or other
transaction resulting in a financial benefit to the shareholder. An interested
shareholder is a person who, together with affiliates and associates, owns (or
within five years did own) 20% or more of the corporation's voting shares.
Certificate of incorporation and bylaws. Our certificate of incorporation
provides for a board of directors divided into three classes, each of which
generally serves for a term of three years, with only one class of directors
being elected each year. Nominations for our board of directors may be made by
our board or by any shareholder entitled to vote for the election of directors.
A shareholder entitled to vote for the election of directors may nominate a
person or persons for election as director only if written notice of such
shareholder's intent to make such nomination is given to our secretary not later
than 120 days in advance of the meeting. Our certificate of incorporation and
by-laws do not provide for cumulative voting rights. This means that holders of
a majority of our capital shares who vote in the election of directors can elect
all of the directors and, in such event, the holders of the remaining shares
will not be able to elect any of our directors.
New York Law provides that, unless otherwise provided in a corporation's
certificate of incorporation, any action by the shareholders may be taken
without a meeting, without prior notice and without a vote, upon the written
consent of shareholders holding not less than the minimum number of votes that
would be necessary to take action on the matter at a shareholder meeting. Our
29
certificate of incorporation provides that shareholder actions by consent
require the consent of all of our shareholders. This has the effect of delaying
the ability of a majority shareholder to acquire control of our board of
directors.
Undesignated preferred shares enable us to render more difficult or to
discourage a third party's attempt to obtain control of us by means of a tender
offer, proxy contest, merger, or otherwise, which protects the continuity of our
management. A party may also be discouraged from making a bid for our common
shares because the issuance of our preferred shares may adversely affect the
rights of the holders of our common shares. For example, preferred shares that
we issue may rank prior to our common shares as to dividend rights, liquidation
preferences, or both, may have full or limited voting rights and may be
convertible into common shares. Accordingly, the issuance by us of preferred
shares may discourage or delay bids for our common shares or may otherwise
adversely affect the market price of our common shares.
Market for Common Equity and Related Shareholder Matters
Market Information
Our common shares are listed on the American Stock Exchange under the
symbol CVU. The trading symbol changed from CPIA to CVU on September 5, 2000,
when CPI ceased trading on The Nasdaq SmallCap Market, Inc. and began trading on
the AMEX.
The following tables set forth for 2001 and 2002, the high and low sales
prices of our common shares for the periods indicated, as reported by AMEX.
-----------------------------------------------------------------------------
Period High Low
------ ---- ---
2001
----
Quarter Ended March 31, 2001 $3.930 $1.800
Quarter Ended June 30, 2001 $3.150 $1.650
Quarter Ended September 30, 2001 $1.700 $1.150
Quarter Ended December 31, 2001 $2.190 $1.200
2002
----
Quarter Ended March 31, 2002 $1.850 $1.400
Quarter Ended June 30, 2002 $8.460 $1.450
Quarter Ended September 30, 2002 $7.750 $4.080
Quarter Ended December 31, 2002* $_____ $_____
-----------------------------------------------------------------------------
On ________ __, 2003, the closing sale price for our common shares on the
AMEX was $____.
Dividend Policy
To date, we have not paid any dividends on our common shares. Any payment
of dividends in the future is within the discretion of our board of directors
and will depend on our earnings, if any, our capital requirements and financial
condition and other relevant factors. Our board of directors does not intend to
declare any cash or other dividends in the foreseeable future, but intends
instead to retain earnings, if any, for use in our business operations.
In addition, our bank and other lender credit agreements provide that we
may not declare or pay any dividend on our common shares so long as any amounts
are owing to the lenders.
30
Transfer Agent
The transfer agent for our common shares is American Stock Transfer & Trust
Company, 6201 15th Avenue, Brooklyn, New York 11219.
Holders
As of December 13, 2002, there were 131 holders of record of our common
shares. We believe there are in excess of 2,200 beneficial owners of our common
shares.
31
Underwriting
Subject to the terms and conditions contained in the underwriting
agreement, we have agreed to sell to each of the underwriters named below, and
each of the underwriters, for which EarlyBirdCapital, Inc. is acting as
representative, has severally, and not jointly, agreed to purchase on a firm
commitment basis, the number of shares offered in this offering set forth below
opposite their names:
Name Number of Shares
---- ----------------
EarlyBirdCapital, Inc. _________
Total 1,600,000
The underwriters have qualified their obligations under the underwriting
agreement to the approval of legal matters by counsel and various other
conditions. Subject to these conditions, they are obligated to purchase all of
the common shares offered by this prospectus (other than the common shares
covered by the over-allotment option described below).
The representative has advised us that it proposes to offer our securities
to the public at the initial public offering price set forth on the cover page
of this prospectus and to certain dealers at the same price, less a concession
not in excess of $.__ per share of our common shares. The representative may
allow, and such dealers may reallow, a concession not in excess of $__ per share
common share to certain other dealers. After the offering, the representative
may change the offering price and other selling terms.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act. We also have agreed to pay the
representative an expense allowance on a non-accountable basis equal to 3% of
the gross proceeds derived from the sale of the common shares offered by this
prospectus (including the sale of any of our common shares subject to the
underwriters' over-allotment option), $50,000 of which has been paid to date. We
have agreed to pay all expenses in connection with qualifying our securities
offered hereby for sale under the laws of such states as the underwriters may
designate and the filing fees incurred in registering the offering with the
National Association of Securities Dealers, Inc., or NASD.
We have granted to the underwriters an option, exercisable within 45
business days from the date of this prospectus, to purchase at the offering
price, less underwriting discounts and the non-accountable expense allowance, up
to an aggregate of 240,000 additional common shares for the sole purpose of
covering over allotments, if any.
In connection with the offering, we have agreed to sell to the
representative and/or its designees, for an aggregate of $100, a warrant to
purchase up to an aggregate of 160,000 common shares. The representative's
warrant is exercisable initially at a price of $___ per share (110% of the per
share offering price to investors) for a period of four years commencing one
year from the date of this prospectus. The warrant may not be transferred, sold,
assigned, or hypothecated during the one-year period following the date of this
prospectus except to the underwriters and the selected dealers and their
officers or partners. The representative warrant grants to the holders thereof
certain demand rights for a period of five years and "piggyback" rights for a
period of seven years from the date of this prospectus with respect to the
registration under the Securities Act of the common shares issuable upon the
exercise of the warrant.
Pursuant to the underwriting agreement, all of our officers and directors
have agreed not to sell any common shares for 24 months from the date of this
prospectus without the consent of EarlyBirdCapital; except that the
representative has agreed that Mr. Arthur August may adopt a plan under Rule
10b5-1 of the Securities Exchange Act of 1934, pursuant to which he can sell up
to ___________ of his common shares per month. In addition, the underwriting
agreement provides that, for a period of five years from the date of this
prospectus, EarlyBirdCapital will have the right to designate one person to
serve on our board of directors or to send a representative (who need not be the
same individual from meeting to meeting) to observe each meeting of our board of
directors. Such designee or representative, as the case may be, shall be
entitled to receive reimbursement for all reasonable costs incurred in attending
such meetings, including, but not limited to, food, lodging and transportation.
Upon consummation of this offering, we will enter into a Merger and
Acquisition Agreement with EarlyBirdCapital pursuant to which we will compensate
them if we enter into any transaction (including an acquisition or merger, joint
venture, strategic alliance or other arrangements) with persons introduced to us
by EarlyBirdCapital.
32
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate coverage transactions and
penalty bids in accordance with Regulation M under the Exchange Act:
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Over-allotment involves sales by our underwriters of our securities in
excess of the number of securities our underwriters are obligated to
purchase, which creates a syndicate short position. The short position
may be either a covered short position or a naked short position. In a
covered short position, the number of our securities over-allotted by
our underwriters is not greater than the number of our securities that
they may purchase in the over-allotment option. In a naked short
position, the number of our securities involved is greater than the
number of securities in the over-allotment option. Our underwriters
may close out any covered short position by either exercising their
over-allotment option and/or purchasing our securities in the open
market.
o Syndicate covering transactions involve purchases of our securities in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of
securities to close out the short position, our underwriters will
consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they may
purchase securities through the over-allotment option. If our
underwriters sell more securities than could be covered by the
over-allotment option, a naked short position, the position can be
closed out only by buying our securities in the open market. A naked
short position is more likely to be created if our underwriters are
concerned that there could be downward pressure on the price of our
securities in the open market after pricing that could adversely
affect investors who purchase in the offering.
o Penalty bids permit our underwriters to reclaim a selling concession
from a selling group member when the securities originally sold by the
selling group member are purchased in a stabilizing or syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our securities
or preventing or retarding a decline in the market price of our securities. As a
result, the price of our securities may be higher than the price that might
otherwise exist in the open market. These transactions may be effected on The
American Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.
Legal Matters
The validity of the issuance of the common shares offered hereby have been
passed upon for CPI Aerostructures, Inc. by Graubard Miller. Davis & Gilbert LLP
has served as counsel to the underwriters in connection with this offering.
Experts
The financial statements for the years ended December 31, 2000 and 2001
appearing in this prospectus and registration statement have been audited by
Goldstein Golub Kessler LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein.
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
Our by-laws and certificate of incorporation include provisions permitted
under New York law by which our officers and directors are to be indemnified
against various liabilities. We have also entered into indemnification
agreements with our executive officers. We believe that these provisions and
agreements will facilitate our ability to continue to attract and retain
qualified individuals to serve as our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons, we
have been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
33
Where You Can Find Additional Information
We intend to furnish our shareholders with annual reports, which will
include financial statements audited by our independent accountants, and other
periodic reports as we may determine to furnish or as may be required by law,
including Sections 13(a) and 15(d) of the Exchange Act.
As permitted by the rules and regulations of the Commission, this
prospectus does not contain all of the information set forth in the Registration
Statement and in the exhibits and schedules thereto. For further information
with respect to CPI Aerostructures, Inc. and the common shares offered hereby,
reference is made to the Registration Statement and the exhibits thereto.
Statements contained in this prospectus concerning the provisions of documents
filed with the Registration Statement as exhibits and schedules are necessarily
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission. The Registration Statement, including the exhibits and schedules
thereto, may be obtained at the address noted below.
We file annual and other periodic reports pursuant to the requirements of
the Securities Exchange Act of 1934, as amended. Such reports and other
information filed by us may be inspected and copied at the public reference
facilities of the Commission in Washington, D.C., and can be read or obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Commission maintains a website that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission at HTTP://WWW.SEC.GOV.
34
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Independent Auditor's Report F-1
Consolidated Financial Statements:
Balance Sheet as of September 30, 2002 (unaudited)
and December 31, 2001 F-2
Statement of Operations for the Nine Months Ended
September 30, 2002 and 2001 (unaudited) and
for the Years Ended December 31, 2001 and 2000 F-3
Statement of Shareholders' Deficiency for the Years
Ended December 31, 2001 and 2000 F-4
Statement of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 (unaudited) and
for the Years Ended December 31, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6 - F-17
35
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have audited the accompanying consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 2001 and the related
consolidated statements of operations, shareholders' deficiency, and cash flows
for each of the two years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CPI Aerostructures,
Inc. and Subsidiary as of December 31, 2001, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Goldstein Golub Kessler
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 29, 2002, except for the last paragraph of
Note 5, as to which the date is April 12, 2002
F-1
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
September 30, December 31,
2002 2001
--------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 121,002 $ 180,578
Accounts receivable 2,852,597 2,168,369
Costs and estimated earnings in excess of
billings on uncompleted contracts 10,214,846 6,967,385
Deferred income taxes 253,000 758,000
Prepaid expenses and other current assets 23,745 84,895
Assets held for sale - discontinued
operations 280,676 3,217,984
-------------------------------------------------------------------------------
Total current assets 13,745,866 13,377,211
Property, Plant and Equipment, net 110,340 101,260
Deferred Income Taxes, net of valuation
allowance of $2,074,000 - 172,000
Other Assets 179,226 180,226
-------------------------------------------------------------------------------
Total Assets $ 14,035,432 $ 13,830,697
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable $ 4,985,799 $ 4,195,530
Accrued expenses 152,692 535,054
Line of credit - 1,700,000
Debt 8,341,071 9,607,284
Deferred income taxes - 147,000
-------------------------------------------------------------------------------
Total current liabilities 13,479,562 16,184,868
-------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity (Deficiency):
Preferred shares - $.001 par value;
authorized 3,000,000 shares, issued
and outstanding 0 and 0, respectively;
Common shares - $.001 par value;
authorized 50,000,000 shares, issued
and outstanding 2,735,670 and 2,657,046
shares, respectively 2,736 2,657
Additional paid-in capital 12,483,092 12,367,020
Accumulated deficit (11,929,958) (14,723,848)
-------------------------------------------------------------------------------
Shareholders' equity (deficiency) 555,870 (2,354,171)
-------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity (Deficiency) $ 14,035,432 $ 13,830,697
===============================================================================
See Notes to Consolidated Financial Statements
F-2
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
For the Nine Months For the Year
Ended September 30, Ended December 31,
2002 2001 2001 2000
----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Revenue $17,988,748 $10,631,958 $ 15,024,027 $8,261,351
Cost of sales 12,549,892 7,015,993 10,955,264 5,676,229
----------------------------------------------------------------------------------------------------------------------
Gross profit 5,438,856 3,615,965 4,068,763 2,585,122
Selling, general and administrative expenses 1,800,641 1,145,607 1,479,421 1,421,758
----------------------------------------------------------------------------------------------------------------------
Income from operations 3,638,215 2,470,358 2,589,342 1,163,364
----------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Interest income (3,642) 9,223 (2,431) -
Interest expense 318,965 126,707 155,825 106,157
Other (income) expense, net - - 4,051 233,428
----------------------------------------------------------------------------------------------------------------------
Total other expenses, net 315,323 135,930 157,445 339,585
----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before benefit
for income taxes 3,322,892 2,334,428 2,431,897 823,779
(Provision for) benefit from income taxes (529,000) (934,000) - 126,000
----------------------------------------------------------------------------------------------------------------------
Income before operations of discontinued segment 2,793,892 1,400,428 2,431,897 949,779
Income (loss) from operations of discontinued segment - (1,571,481) (3,647,200) 979,427
Loss on disposal of assets - discontinued segment - - (10,422,816) -
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,793,892 $ (171,053) $(11,638,119) $1,929,206
======================================================================================================================
Basic net income (loss) per common share:
Income before discontinued operations $ 1.03 $ .53 $ .92 $ .36
Income (loss) from operations of
discontinued segment - (.59) (1.37) .37
Loss on disposal of assets - discontinued segment - - (3.94) -
----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic $ 1.03 $ (.06) $ (4.39) $ .73
======================================================================================================================
Diluted net income per common share:
Income before discontinued operations $ .89 - - $ .34
Income from operations of discontinued segment .36
----------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted $ .89 - - $ .70
======================================================================================================================
Shares used in computing earnings per common share:
Basic 2,700,785 2,652,355 2,653,538 2,648,509
Diluted 3,136,626 2,652,355 - 2,763,888
======================================================================================================================
See Notes to Consolidated Financial Statements
F-3
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
--------------------------------------------------------------------------------
Years ended December 31, 2000 and 2001
----------------------------------------------------------------------------------------------------------------------
Additional Total
Common Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Deficiency
----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 2,648,509 $2,649 $12,206,024 $ (5,014,935) $ 7,193,738
Net income - - - 1,929,206 1,929,206
Amortization of fair value of
warrants issued in conjunction
with consulting agreement - - 113,650 - 113,650
----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 2,648,509 2,649 12,319,674 (3,085,729) 9,236,594
Net loss - - - (11,638,119) (11,638,119)
Amortization of fair value of
warrants issued in conjunction
with consulting agreement 8,537 8 47,346 - 47,354
----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 2,657,046 $2,657 $12,367,020 $(14,723,848) $ (2,354,171)
======================================================================================================================
See Notes to Consolidated Financial Statements
F-4
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
For the Nine Months For the Year
Ended September 30, Ended December 31,
2002 2001 2001 2000
--------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Cash flows from operating activities:
Net income before operations of discontinued segment $ 2,793,892 $ 1,400,428 $ 2,431,897 $ 949,779
Adjustments to reconcile net income before operations of
discontinued segment to net cash provided by (used in)
operating activities:
Depreciation and amortization 30,931 26,362 35,653 30,194
Warrants issued for consulting fees 5,782 47,346 47,354 113,650
Loss on disposal of fixed assets 26,267 6,157 -
Deferred portion of provision (benefit) for income taxes 6,158 92,000 (879,000)
Bad debts 530,000 - - 301,377
Changes in operating assets and liabilities:
Increase in accounts receivable (684,228) (326,206) (1,336,061) (410,591)
Decrease in income tax refund receivable - - - 29,597
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts (3,247,461) (2,260,561) (2,563,606) (465,250)
(Increase) decrease in prepaid expenses and other
current assets 61,150 9,969 (63,816) 761,672
(Increase) decrease in other assets 1,000 (1,000) (1,000) (70,259)
Increase in accounts payable and accrued expenses 407,905 180,090 1,028,720 144,878
Decrease in income taxes payable - (34,000) (33,000) (13,383)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (74,762) (951,414) (355,702) 492,664
--------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (40,011) (14,507) (19,307) (70,838)
Proceeds from sale of fixed assets - 1,800 1,800 -
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,011) (12,707) (17,507) (70,838)
--------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from line of credit (2,966,213) (1,274,018) - 1,325,000
Net repayment of long-term debt 84,102 - (895,958) (1,056,959)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,882,111) (1,274,018) (895,958) 268,041
--------------------------------------------------------------------------------------------------------------------------
Net cash from continuing operations (2,996,884) (2,238,139) (1,269,167) 689,867
Net cash provided by (used in) discontinued operations 2,937,308 2,386,569 1,386,766 (814,534)
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (59,576) 148,430 117,599 (124,667)
Cash at beginning of period 180,578 62,979 62,979 187,646
--------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 121,002 $ 211,409 $ 180,578 $ 62,979
==========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 167,015 $ 589,762
==========================================================================================================================
Income taxes $ 13,355 $ 36,050
==========================================================================================================================
Supplemental schedule of noncash financing activity:
Financing obligation incurred in connection with the
acquisition of equipment $ - $ 143,908
==========================================================================================================================
See Notes to Consolidated Financial Statements
F-5
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. PRINCIPAL The Company consists of CPI Aerostructures, Inc.("CPI") and
BUSINESS its wholly owned subsidiary, Kolar, Inc. ("Kolar"),
ACTIVITY AND collectively, the "Company."
SUMMARY OF
SIGNIFICANT CPI's operations consist of the design and production of
ACCOUNTING design and production of complex aerospace structural
POLICIES: subassemblies under U.S. government and commercial
contracts. The length of the Company's contracts varies but
is typically between one and two years for U.S. government
contracts and up to 10 years for commercial contracts.
Kolar's principal business was the precision computer
numerical control machining of metal products on a
contract-order basis.
CPI's revenue is recognized based on the percentage of
completion method of accounting for long-term contracts
measured by the percentage of total costs incurred to date
to estimated total costs at completion for each contract.
Contract costs include all direct material, labor costs,
tooling and those indirect costs related to contract
performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred.
Estimated losses on uncompleted contracts are recognized in
the period in which such losses are determined. Changes in
job performance may result in revisions to costs and income
and are recognized in the period in which revisions are
determined to be required. In accordance with industry
practice, costs and estimated earnings in excess of billings
on uncompleted contracts, included in the accompanying
consolidated balance sheet, contain amounts relating to
contracts and programs with long production cycles, a
portion of which will not be realized within one year. CPI's
recorded revenue may be adjusted in later periods in the
event that CPI's cost estimates prove to be inaccurate or a
contract is terminated.
Kolar's revenue was recognized when goods were shipped to
customers.
The Company maintains cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company
has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on
cash.
Depreciation and amortization of property, plant and
equipment is provided for by the straight-line method over
the estimated useful lives of the respective assets or the
life of the lease, for leasehold improvements.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires the use of estimates by
management. Actual results could differ from these
estimates.
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, the Company has elected to apply
APB Opinion ("APB") No. 25 and related interpretations in
accounting for its stock options issued to employees and,
accordingly, does not recognize additional compensation cost
as required by SFAS No. 123. The Company, however, has
provided the pro forma disclosures as if the Company had
adopted the cost recognition requirements.
F-6
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Basic earnings per common share is computed using the
weighted-average number of shares outstanding. Diluted
earnings per common share is computed using the
weighted-average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options and
warrants to purchase common stock. Incremental shares of
115,379 were used in the calculation of diluted earnings per
common share in 2000. In 2001, diluted earnings per share is
not presented as the result is antidilutive.
In July 2001, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 addresses financial accounting and reporting
for business combinations. This statement requires the
purchase method of accounting to be used for all business
combinations, and prohibits the pooling-of-interests method
of accounting. This statement is effective for all business
combinations initiated after June 30, 2001 and supersedes
APB No. 16, Business Combinations, as well as No. 38,
"Accounting for Preacquisition Contingencies of Purchased
Enterprises.
SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets should
be accounted for in financial statements upon their
acquisition. This statement requires goodwill to be
periodically reviewed for impairment rather than amortized,
beginning on January 1, 2002. SFAS No. 142 supersedes APB
No. 17, Intangible Assets.
The Company believes that SFAS No. 142 will not be
applicable to its future financial statements because all
goodwill has been entirely written down in conjunction with
the sale of Kolar's assets (see Note 5).
In August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. This
statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and amends the accounting and reporting
provisions of APB No. 30, Reporting the Results of
Operations, Reporting the Effect of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a
segment of a business. The provisions of SFAS No. 144 will
be effective for fiscal years beginning after December 15,
2001.
Pursuant to the effective dates and transitions stated in
SFAS No. 144, the Company is currently evaluating the
implications of its adoption, and anticipates adopting the
provisions for its fiscal year beginning January 1, 2002.
F-7
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The financial statements as of September 30, 2002 and for
the nine months ended September 30, 2002 and 2001 are
unaudited; however, in the opinion of the management of the
Company, these financial statements reflect all adjustments
(consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of the
Company and the results of operations for such interim
periods and are not necessarily indicative of the results to
be obtained for a full year.
2. COSTS AND Costs and estimated earnings in excess of billings on
ESTIMATED uncompleted contracts consist of:
EARNINGS IN
EXCESS ON
BILLINGS ON
UNCOMPLETED
CONTRACTS
September 30, 2002 December 31, 2001
----------------------------------------------------------------------------------------------------------------
(unaudited)
U.S. U.S.
Government Commercial Total Government Commercial Total
----------------------------------------------------------------------------------------------------------------
Costs incurred on
uncompleted
contracts $18,413,197 $13,017,710 $31,430,907 $7,359,234 $12,485,185 $19,844,419
Estimated earnings 7,810,645 5,947,898 13,758,543 2,040,413 6,728,158 8,768,571
----------------------------------------------------------------------------------------------------------------
26,223,842 18,965,608 45,189,450 9,399,647 19,213,343 28,612,990
Less billings to
date 18,063,324 16,911,280 34,974,604 5,425,681 16,219,924 21,645,605
----------------------------------------------------------------------------------------------------------------
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts $ 8,160,518 $ 2,054,328 $10,214,846 $3,973,966 $ 2,993,419 $ 6,967,385
================================================================================================================
Unbilled costs and estimated earnings are billed in
accordance with applicable contract terms. As of December
31, 2001, approximately $1,203,000 of the balances above are
not expected to be collected within one year.
3. PROPERTY Property, plant and equipment, at cost, consists of the
PLANT AND following:
EQUIPMENT: Estimated
December 31, 2001 Useful Life
------------------------------------------------------------
Machinery and equipment $304,306 5 to 10 years
Computer equipment 134,019 9 years
Furniture and fixtures 19,504 7 years
Automobiles and trucks 23,488 5 years
Leasehold improvements 71,591 3 years
------------------------------------------------------------
552,908
Less accumulated depreciation
and amortization 451,648
------------------------------------------------------------
$101,260
============================================================
F-8
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Depreciation and amortization expense for the years ended
December 31, 2001 and 2000 was $35,653 and $30,194,
respectively.
4. RELATED PARTY In October 2000, the Company adopted a Greit Plan for the
TRANSACTIONS: purpose of offering senior management a deferred
compensation death benefit plan (the "Plan") that provides a
tax-free benefit and which is tax-neutral to the Company.
Pursuant to the Plan, the Company made a noninterest-bearing
loan to an employee in the amount of $150,000, which was
used to purchase the Plan. This Plan has since been
terminated and the surrender value has been returned to the
employee who has placed the proceeds from the surrender
value in an annuity, which will mature to $150,000.
The employee also assigned to the Company an insurance
policy on his life in the amount of $150,000 and agreed to
maintain it until the date upon which the annuity matures to
$150,000, and is included in other assets at December 31,
2001. Accordingly, the loan to the employee will be repaid
upon the maturity date of the annuity or upon the death of
the employee, whichever occurs first.
5. DISCONTINUED On January 22, 2002, the Company announced a decision made
OPERATIONS: by the board of directors as of December 31, 2001 to close
the Kolar facilities located in Ithaca, New York, and
liquidate Kolar's assets through a public auction of its
machinery and equipment and a private sale of its real
estate. On February 21, 2002, Kolar sold a substantial
portion of its machinery and equipment at an auction
conducted by Daley-Hodkin Corporation at Kolar's main
facility in Ithaca, New York. In connection with the
discontinuance of Kolar's operations, the Company incurred a
one-time charge of $10,422,816 related to the write-off of
Kolar's assets, net of expected proceeds, and an accrual for
estimated losses during the phase-out period. Proceeds from
actual and future sales of machinery, equipment and real
property are estimated to be approximately $3,970,000. The
disposition of Kolar's operations represents a disposal of a
business segment under APB No. 30. Accordingly, results of
the operation have been classified as discontinued, and
prior periods have been restated. For business segment
reporting purposes, Kolar's business results were previously
classified as the "Machining" segment.
Net sales and income (loss) from the discontinued operations
are as follows:
For the nine months ended
September 30, 2002 2001
------------------------------------------------------------
Net sales $ --- $6,840,056
============================================================
Pretax loss from discontinued
operations $ --- $2,505,481
Income tax benefit --- 934,000
------------------------------------------------------------
Net loss from discontinued
operations $ --- $1,571,481
============================================================
F-9
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For the three months ended
September 30, 2002 2001
------------------------------------------------------------
Net sales $ --- $2,624,512
============================================================
Pretax loss from discontinued
operations $ --- $ 779,997
Income tax benefit --- 534,000
------------------------------------------------------------
Net loss from discontinued
operations $ --- $ 245,997
============================================================
Assets of the discontinued operations are as follows:
September 30, 2002
------------------------------------------------------------
Property, plant and equipment, net $ 280,676
============================================================
Year ended December 31, 2001 2000
------------------------------------------------------------
Net sales $8,291,690 $20,360,330
============================================================
Pretax income (loss) from
discontinued operations $(3,647,200) $ 729,427
Pretax loss on disposal of
business segment (10,422,816) -
Income tax benefit - 250,000
------------------------------------------------------------
Net income (loss) from
discontinued operations $(14,070,016) $ 979,427
============================================================
Assets of the discontinued operations were as follows:
Year ended December 31, 2001
------------------------------------------------------------
Current assets $ 610,492
Property, plant and equipment, net 2,607,492
------------------------------------------------------------
Total assets of discontinued operations $ 3,217,984
============================================================
Proceeds from the auction sale were approximately $1,350,000
for the machinery and equipment owned by Kolar. These
proceeds have been applied to the reduction of certain bank
debt having a principal amount of $2,260,000 outstanding
immediately prior to the auction. After giving effect to the
applications of the proceeds to the bank debt, the remaining
outstanding principal of the bank debt is $910,000.
F-10
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. DEBT: Debt consists of the following:
September 30, December 31,
2002 2001
(unaudited)
------------------------------------------------------------
Note payable - bank (a) $2,431,571 $2,438,500
Note payable - bank (b) 259,077 805,320
Note payable - seller (c) 624,484 4,691,202
Note payable - seller (d) 4,898,035 -
Capitalized lease
obligations payable (e) 127,904 1,672,262
------------------------------------------------------------
$8,341,071 $9,607,284
============================================================
(a) The note, as amended in June 2002, is payable to a
commercial bank in monthly installments from $50,000 to
$100,000 through May 30, 2003, and the remaining unpaid
balance at June 30, 2003, plus monthly interest at the
bank's published prime rate (4.75% at September 30,
2002) plus 3.5%. This note is collateralized by
substantially all of the assets of the Company.
Approximately $1,249,000 of this loan was repaid upon
the sale of certain assets at auction. The note
requires the Company to maintain specified levels of
working capital and other financial ratios, as defined.
The line of credit of $1,700,000 previously listed
separately on the balance sheet is now incorporated
into this note.
(b) The note is payable to a commercial bank in monthly
installments of $9,847, including interest at 8.3%.
This note is collateralized by Kolar's land and
buildings. The Company sold certain of the underlying
land and buildings during 2002 at an aggregate selling
price of approximately $555,000. The Company estimates
that the sale of the remaining land and buildings will
yield proceeds sufficient to repay the note in full.
(c) The note is payable to a commercial bank in monthly
installments of $20,000 through May 30, 2003, and the
remaining unpaid balance at June 30, 2003, plus monthly
interest at the bank's published prime rate (4.75% at
September 30, 2002) plus 3.5%. This note is
collateralized by substantially all of the assets of
the Company and was previously included in the
capitalized lease obligations payable of the Company.
(d) In 1997, the Company acquired substantially all of the
assets of Kolar Machine Inc. The acquisition was
partially financed through a $4,000,000 note payable to
the seller ("Seller") of Kolar Machine Inc. The note
payable to the Seller bears interest at 8% per annum.
The note matures on September 30, 2003. Until then, it
will continue to accrue interest, which will be paid at
maturity together with the principal amount, pursuant
to the terms of the subordination agreement between the
bank lenders and the Seller. The Seller is presently
prohibited from receiving current payments of interest
on its note. The note payable - Seller is convertible
into 333,334 shares of the Company's common stock at
any time prior to the maturity of the note. The note is
subordinated to the notes payable - bank.
(e) The Company leases equipment under a capital lease
which expires October 24, 2003. The lease requires a
monthly payment of $10,227.02, including interest at
9.35%. As of September 30, 2002, proceeds of
approximately $674,000 were received upon the sale of
certain leased equipment, which amount was remitted to
the owners of the equipment.
F-11
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. LINE OF CREDIT: The Company has an aggregate $1,700,000 line of credit
agreement, expiring June 30, 2002, with JP Morgan Chase and
Mellon Bank for working capital and other corporate purposes
as needed. Borrowings are subject to limits based on amounts
of accounts receivable, as defined. Interest is at the
banks' prime rate (4.75% at December 31, 2001) plus 3.5%.
The line of credit is collateralized by substantially all of
the assets of the Company.
8. COMMITMENTS: The Company has employment agreements with four employees.
The aggregate future commitment under these agreements is as
follows:
Year ending December 31,
2002 $ 765,200
2003 495,100
2004 468,280
------------------------------------------------------------
$1,728,580
============================================================
These agreements provide for additional bonus payments that
are calculated as defined.
9. INCOME TAXES: The benefit for income taxes consists of the following:
Year ended December 31, 2000
------------------------------------------------------------
Current:
Federal $ 4,000
State and local 10,000
------------------------------------------------------------
14,000
------------------------------------------------------------
Deferred:
Federal (101,000)
State and local (39,000)
-----------------------------------------------------------
(140,000)
-----------------------------------------------------------
$(126,000)
===========================================================
F-12
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The difference between the income tax provision (benefit)
computed at the federal statutory rate and the actual tax
provision (benefit) is accounted for as follows:
December 31, 2001 2000
------------------------------------------------------------
Taxes (benefit) computed at
the federal statutory rate $(3,957,000) $ 280,000
State income taxes, including
deferred, net of federal
benefit - 7,000
Other, including officers' life
insurance and various permanent
differences - 59,000
Utilization of net operating
loss carryforward - (472,000)
Valuation allowance 3,957,000 -
------------------------------------------------------------
$ - 0 - $(126,000)
============================================================
The components of deferred income tax assets and liability
at December 31, 2001 are as follows:
Current Noncurrent
------------------------------------------------------------
Assets:
Federal and state net
operating loss carryforwards $ 758,000 $ 2,246,000
Valuation allowance - (2,074,000)
------------------------------------------------------------
$ 758,000 $ 172,000
============================================================
Liability - long-term contracts $ 147,000 $ - 0 -
============================================================
As of December 31, 2001, the Company had net operating loss
carryforwards of approximately $8,035,000 and $5,672,000 for
federal and state income tax purposes, respectively,
expiring through 2021.
10. EMPLOYEE STOCK In April 1992, the Company adopted the 1992 Stock Option
OPTION PLANS: Plan (the "1992 Plan"). The 1992 Plan, for which 83,334
common shares are reserved for issuance, provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, consultants or others who
provide services to the Company. The initial options granted
to employees and directors with three or more years of
service became exercisable as to one-third of the shares
each year beginning on September 16, 1992. The initial
options granted to those with less than three years of
service became exercisable as to one-third of the shares
each year beginning on September 16, 1993. The options may
not be exercised more than five years from the date of
issuance. In 1995, the option price for all outstanding
F-13
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
employees' and directors' stock options was lowered to
$9.00.
In 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"), as amended, for which 200,000 common shares
are reserved for issuance. The 1995 Plan provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, consultants or others who
provide services to the Company. The options' exercise price
is equal to the closing price of the Company's shares on the
day of issuance, except for incentive stock options granted
to the Company's president, which are exercisable at 110% of
the closing price of the Company's shares on the date of
issuance.
In 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan"). The 1998 Plan, as amended, reserved 463,334
common shares for issuance. The 1998 Plan provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, consultants or others who
provide services to the Company. The options' exercise price
is equal to the closing price of the Company's shares on the
day of issuance, except for incentive stock options granted
to the Company's president, which are exercisable at 110% of
the closing price of the Company's shares on the date of
issuance.
In 2000, the Company adopted the 2000 Stock Option Plan (the
"2000 Plan"). The 2000 Plan, as amended, reserved 830,000
common shares for issuance. The 2000 Plan provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, consultants or others who
provide services to the Company. The options' exercise price
is equal to the closing price of the Company's shares on the
day of issuance, except for incentive stock options granted
to the Company's president, which are exercisable at 110% of
the closing price of the Company's shares on the date of
issuance.
The Company has 6,779 options available for future grant
under the 1992 Plan, 40,640 options available for grant
under the 1995 Plan, 12,332 options available for grant
under the 1998 Plan, and 250,000 options available for grant
under the 2000 Plan.
If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net income (loss) and
earnings (loss) per share would have been adjusted to the
pro forma amounts indicated in the table below:
As Reported Pro Forma
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------
Net income (loss) $(11,638,119) $1,929,206 $(11,937,395) $1,832,000
=======================================================================================================
Earnings (loss) per share:
Basic $ (4.39) $ .73 $ (4.50) $ .69
Diluted $ (4.39) $ .70 $ (4.50) $ .66
=======================================================================================================
F-14
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A summary of the status of the Company's four stock option
plans as of December 31, 2001 and 2000 and changes during
those years is as follows:
Year ended December 31, 2001 2000
-----------------------------------------------------------------------------------------------
Weighted- Weighted-
average average
Exercise Exercise
Fixed Options Options Price Options Price
-----------------------------------------------------------------------------------------------
Outstanding at beginning
of year 894,312 $3.54 515,313 $4.27
Granted during year 225,000 1.29 408,000 2.67
Exercised - - - -
Forfeited 20,640 4.95 29,001 4.11
-----------------------------------------------------------------------------------------------
Outstanding at end of year 1,098,672 $3.06 894,312 $3.54
===============================================================================================
The following table summarizes information about stock
options outstanding and exercisable at December 31, 2001:
Weighted Weighted-
Number Average Weighted-
Outstanding Remaining average
Range of and Contractual Exercise
Exercise Price Exercisable Life Price
-----------------------------------------------------------------------------------------------
$1.20 - $8.46 1,098,672 4.99 years $3.06
===============================================================================================
The Company's assumptions used to calculate the fair values
of options issued were (i) risk-free interest rate of 5.25%,
(ii) expected life of five years, (iii) expected volatility
of 174.71% and (iv) expected dividends of zero.
11. WARRANTS In February 1997, the Company issued options to purchase
AND OPTIONS: 3,334 shares of common stock to two directors at an exercise
price of $6.18 per share of common stock. These options
expire in 2002.
In January 1998, the Company issued options to purchase
25,000 shares of common stock to a consultant, who was also
a director, at an exercise price of $7.50 per share of
common stock. In February 1998, the Company issued options
to purchase 3,334 shares of common stock to two directors at
an exercise price of $6.93 per share of common stock. These
options expire in 2003.
In March 1998, the Company issued 33,334 warrants to Gaines
Berland, Inc. (now known as Ladenburg Capital Management
Inc.) as compensation for acting as the Company's investment
banker pursuant to a consulting agreement. These warrants
entitle the investment banker to purchase 33,334 shares of
common stock at an exercise price of $7.50 during the
five-year period commencing April 1, 1998. This agreement
F-15
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
was terminated in 1999. In 1999, the Company recorded a
charge to operations of $198,734 to write off the
unamortized portion of warrants issued under this agreement.
In May 1999, the Company issued 100,000 warrants to Catalyst
Financial Corp. as partial compensation in the amount of
$227,300 for acting as the Company's investment banker
pursuant to a consulting agreement. These warrants entitle
the investment banker to purchase 100,000 shares of common
stock at an exercise price of $1.875 during the five-year
period commencing May 4, 1999. In 2001, 8,537 of these
warrants were exercised. In December 1999, the Company
issued options to purchase 15,000 shares of common stock to
a consultant at the exercise price of $2.53 per share of
common stock. Also in December 1999, the Company issued
options to purchase 10,000 shares of common stock to two
directors at an exercise price of $2.53 per share of common
stock.
12. EMPLOYEE On September 11, 1996, CPI's board of directors instituted a
BENEFIT PLANS: defined contribution plan under Section 401(k) of the
Internal Revenue Code (the "Code"). On October 1, 1998, the
Company amended and standardized both the CPI and Kolar
plans as required by the Code. Pursuant to the amended plan,
qualified employees may contribute a percentage of their
pretax eligible compensation to the Plan and the Company
will match a percentage of each employee's contribution.
Additionally, the Company has a profit-sharing plan covering
all eligible employees. Contributions by the Company are at
the discretion of management. The amount of contributions
recorded by the Company in 2001 and 2000 amounted to $88,412
and $184,373, respectively.
13. CONTINGENCIES: Kolar is currently in the process of liquidating all of its
assets through an auction of its fixed assets and the
private sale of its real estate. The proceeds of this
liquidation will be used to reduce Kolar's liabilities on
certain bank debt. The bank debt and Kolar's obligations to
its previous owner are secured by liens on the assets and
real estate to be sold and are guaranteed by the Company.
Various creditors have made claims against Kolar. There can
be no assurance that satisfactory payment terms will be made
with any of Kolar's creditors or with the banks regarding
the balance of portions of the debt, which is currently due
no later than June 30, 2002.
From time to time, the Company is subject to routine
litigation incidental to its business. The Company believes
that the settlement of any pending legal proceedings will
not have a material adverse effect on the Company's
financial condition.
F-16
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. MAJOR Approximately 92% and 76% of the Company's consolidated net
CUSTOMERS: sales in 2001 and 2000 were to the U.S. government.
Sales to a significant commercial customer accounted for
approximately 24% of the Company's consolidated net sales
for the year ended December 31, 2000.
At December 31, 2001, approximately 77% of accounts
receivable was due from the U.S. government.
--------------------------------------- ------------------------------------
No dealer, salesperson or any other
person is authorized to give any
information or make any representations
in connection with this offering other
than those contained in this prospectus CPI AEROSTRUCTURES, INC.
and, if given or made, the information or
representations must not be relied upon
as having been authorized by us. This -----------------
prospectus does not constitute an offer
to sell or a solicitation of an offer
to buy any security other than the 1,600,000 Common Shares
securities offered by this prospectus,
or an offer to sell or a solicitation
of an offer to buy any securities by
anyone in any jurisdiction in which -----------------
the offer or solicitation is not
authorized or is unlawful. The delivery PROSPECTUS
of this prospectus will not, under any
circumstances, create any implication -----------------
that the information is correct as of
any time subsequent to the date of
this prospectus.
-------------------------
TABLE OF CONTENTS
Page
Summary..........................3
Risk Factors.....................8
Use of Proceeds.................12
Capitalization..................13
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......14
Business........................18
Management......................24
Principal Shareholders..........28 _____________ __, 2002
Description of Our
Capital Shares..................29
Underwriting....................32
Legal Matters...................33 EarlyBirdCapital, Inc.
Experts.........................33
Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities......33
Where You Can Find
Additional Information..........34
Index to Financial Statements...35
-------------------------
Part II
Information Not Required in Prospectus
ITEM 24. Indemnification of Directors and Officers
Sections 721 through 726, inclusive, of the Business Corporation Law of New
York ("BCL") authorizes New York corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been officers or directors and to purchase and maintain insurance for
indemnification of such officers and directors. Section 402(b) of the BCL
permits a corporation, by so providing in its certificate of incorporation, to
eliminate or limit directors' personal liability to the corporation or its
shareholders for damages arising out of certain alleged breaches of their duties
as directors. The BCL, however, provides that no such limitation of liability
may affect a director's liability with respect to any of the following: (1) acts
or omissions made in bad faith or which involved intentional misconduct or a
knowing violation of law; (2) any transaction from which the director derived a
financial profit or other advantage to which he was not legally entitled; (3)
the declaration of dividends or other distributions or purchase or redemption of
shares in violation of the BCL; or (4) the distribution of assets to
shareholders after dissolution of the corporation without paying or adequately
providing for all known liabilities of the corporation or making loans to
directors in violation of the BCL.
The Registrant's Certificate of Incorporation, as amended, provides that
the personal liability of the directors of the Registrant is eliminated to the
fullest extent permitted by Section 402(b) of the BCL. In addition, the Amended
and Restated By-laws of the Registrant provide in substance that, each director
and officer shall be indemnified by the Registrant against reasonable expenses,
including attorney's fees, and any liabilities that he or she may incur in
connection with any action to which he or she may be made a party by reason of
his or her being or having been a director or officer of the Registrant. The
indemnification provided by the Registrant's By-laws is not deemed exclusive of
or in any way to limit any other rights which any person seeking indemnification
may be entitled. The Registrant also has directors' and officers' liability
insurance.
In addition, the Registrant has entered into Indemnification Agreements
with each of its executive officers and directors which provide that the
Registrant will indemnify and advance expenses to such officer or director to
the fullest extent permitted by law and provides the procedure for entitlement
of indemnification.
ITEM 25. Other Expenses of Issuance and Distribution
The estimated expenses actually paid and payable by us in connection with
the distribution of the securities being registered are as follows:
SEC Registration and Filing Fee.................... $ 996.92
NASD Filing Fee.................................... 1,489.00
American Stock Exchange Additional
Listing Fee................................. 22,500.00
Legal Fees and Expenses............................
Accounting Fees and Expenses.......................
Financial Printing and Engraving...................
Blue Sky Fees and Expenses.........................
Transfer Agent and Registrar Fees..................
Nonaccountable Expense Allowance...................
Miscellaneous...................................... __________
TOTAL.............................................. $
i
ITEM 26. Recent Sales of Unregistered Securities
CPI Aerostructures, Inc. made the following sales of unregistered
securities during the past three years:
------------------ --------------------- --------------- --------------------- ------------------ -------------------
Consideration
Received and
Description of If Option,
Underwriting or Warrant or
Other Discounts to Convertible
Market Price Exemption from Security, Terms
Afforded to Registration of Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
------------------ --------------------- --------------- --------------------- ------------------ -------------------
05/18/00 Options to purchase 115,000 Options granted to 4(2) Immediately
common shares employees - no exercisable until
other consideration 12/31/04 at an
received by Company exercise price of
until exercise $2.79 per share
------------------ --------------------- --------------- --------------------- ------------------ -------------------
05/31/00 Options to purchase 350,000 Options granted to 4(2) Immediately
common shares employees - no exercisable until
other consideration 5/31/10 at an
received by Company exercise price of
until exercise $2.59 per share
------------------ --------------------- --------------- --------------------- ------------------ -------------------
04/18/01 Common Shares 25,000 Option granted to 4(2) Fully exercisable
employee - pursuant upon the date of
to the Performance grant
Equity Plan 2000;
no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
05/31//01 Common Shares 8,537 Common Shares 4(2) N/A
issued to
consultant upon the
exercise of
options; no cash
consideration
received by us as a
result of cashless
exercise provision
------------------ --------------------- --------------- --------------------- ------------------ -------------------
08/14/01 Common Shares 200,000 Option granted to 4(2) Fully exercisable
employee pursuant upon the date of
to the Performance grant
Equity Plan 2000;
no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
ii
------------------ --------------------- --------------- --------------------- ------------------ -------------------
Consideration
Received and
Description of If Option,
Underwriting or Warrant or
Other Discounts to Convertible
Market Price Exemption from Security, Terms
Afforded to Registration of Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
------------------ --------------------- --------------- --------------------- ------------------ -------------------
2/1/02-6/18/02 Common Shares 300,000 Options granted to 4(2) Fully exercisable
employees and upon the date of
directors pursuant grant for five or
to the Performance ten years at
Equity Plan 2000 exercise prices
and 1998 Stock ranging from
Option Plan; no $1.65 to $6.35
cash consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
2/1/02 Common Shares 5,000 Non-Plan Option 4(2) Fully exercisable
issued to upon the date of
consultant to grant until
purchase common February 1, 2007
shares; no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
4/18/02 Common Shares 50,000 Common Shares 4(2) N/A
issued to bank in
consideration of
extending due date
of loan; no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
5/21/02 Common Shares 20,833 Common Shares 4(2) N/A
issued to employees
upon the exercise
of options;
$84,102 cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
6/03/02 Common Shares 2,653 Common Shares 4(2) N/A
issued to
consultants upon
the cashless
exercise of
warrants; no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
6/24/02 Common Shares 4,137 Common Shares 4(2) N/A
issued to
consultants upon
the cashless
exercise of
warrants; no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
iii
------------------ --------------------- --------------- --------------------- ------------------ -------------------
Consideration
Received and
Description of If Option,
Underwriting or Warrant or
Other Discounts to Convertible
Market Price Exemption from Security, Terms
Afforded to Registration of Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
------------------ --------------------- --------------- --------------------- ------------------ -------------------
8/16/02 Common Shares 20,000 Common Shares 4(2) N/A
issued to bank in
consideration of
services; no cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
09/09/02 Common Shares 1,000 Common Shares 4(2) N/A
issued to employee
upon the exercise
of options;
$2,870 cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
11/11/02 Common Shares 30,000 Common Shares 4(2) N/A
issued to employee
upon the exercise
of options;
$93,900 cash
consideration
received by us
------------------ --------------------- --------------- --------------------- ------------------ -------------------
ITEM 27. Exhibits
Exhibit Number Name of Exhibit No. in Document
-------------- --------------- ---------------
*1.1 Form of Underwriting Agreement N/A
3.1 Certificate of Incorporation of the Company, as amended. (1) 3.1
3.1(a) Certificate of Amendment of Certificate of Incorporation filed on July 14, 1998. (2) 3.1(a)
3.2 Amended and Restated By-Laws of the Company. (1) 3.2
*4.7 Form of Warrant issued to Representative N/A
**5.1 Opinion of Graubard Miller N/A
10.1 1992 Stock Option Plan. (1) 10.3
10.2 1995 Employee Stock Option Plan. (3) 10.4
10.3 Form of military contract. (1) 10.7
10.4 Asset Purchase Agreement, dated September 9, 1997 by and among Kolar Machine, Inc., a 10.19
New York corporation, Daniel Liguori, the Company and Kolar, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company. (5)
iv
Exhibit Number Name of Exhibit No. in Document
-------------- --------------- ---------------
10.5 1998 Performance Equity Plan. (2) 10.28
10.6 Performance Equity Plan 2000. (4) 10.29
10.7 Stock Option Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.35
(5)
10.8 Stock Option Agreement, dated August 14, 2001, between Arthur August and the Company. 10.36
(6)
10.9 Employment Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.37
(7)
10.10 Employment Agreement, dated August 14, 2001, between Arthur August and the Company. (7) 10.38
10.11 Peaceful Possession Agreement, by and among Kolar, Inc., JP Morgan Chase Bank f/k/a/ 10.38
the Chase Manhattan Bank and JP Morgan Leasing, Inc., dated January 24, 2002 (without
schedule). (8)
10.12 Auction Sale Agreement, among Daley-Hodkin Corporation, Kolar, Inc., JP Morgan Chase 10.40
and JP Morgan Leasing, Inc., dated January 10, 2002. (8)
10.13 Amended and Restated Credit Agreement, among the Borrowers, the Lenders and JP Morgan, 10.43
dated June 25, 2002. (9)
10.14 Form of Replacement Term Note, between Kolar and JP Morgan, dated June 25, 2002. (9) 10.44
10.15 Tranche C Intercreditor and Subordination Agreement, among the Lenders, the Borrowers 10.45
and JP Morgan, dated June 25, 2002. (9)
10.16 Tranche C Term Note, among the Borrowers and JP Morgan, dated June 25, 2002. (9) 10.46
10.17 Amendment to Intercreditor and Subordination Agreement, among the Subordinated Lenders 10.47
(as therein defined), the Borrowers and JP Morgan, dated June 25, 2002. (9)
10.18 Amendment to Guarantee and Collateral Agreement among the Borrowers and JP Morgan, 10.48
dated June 25, 2002. (9)
10.19 Tranche C Mortgage, Fixture Filing and Assignment of Leases and Rents, between Kolar 10.49
and JPMorgan, dated June 25, 2002. (9)
10.20 Amendment to Security Agreement, between the Borrowers and Ralok, dated June 25, 2002. 10.50
(9)
10.21 Amended and Restated Seller Note, between the Borrowers and Ralok, dated June 25, 10.51
2002. (9)
10.22 CPI Seller Guaranty Amendment, among CPI and Ralok, dated June 25, 2002. (9) 10.52
10.23 Seller Mortgage Subordination Agreement, between Ralok and JPMorgan, dated June 25, 10.53
2002. (9)
v
Exhibit Number Name of Exhibit No. in Document
-------------- --------------- ---------------
10.24 Mortgage Modification Agreement, between Kolar and JPMorgan, dated June 25, 2002. (9) 10.54
*10.25 Agreement among Ralok, Inc., the Company and Green & Selfler, as Escrow Agent, dated 10.25
November 26, 2002, regarding right to purchase note.
*10.26 Form of Merger & Acquisition Agreement, between the Representative and the Company. N/A
*10.27 Registration Rights Agreement, between the Registrant and GECapital CFE, Inc. dated N/A
February 26, 2002.
*10.27.1 Schedule of Omitted Document in the form of Exhibit
10.27, including material detail in N/A which such
document differs from Exhibit 10.27.
*10.28 Letter Agreement Amending Employment Agreement, between Edward J. Fred and the Company, N/A
dated December 12, 2002.
*21.1 Subsidiaries of the Registrant. N/A
23.1 Consent of Graubard Miller (included as part of its opinion). N/A
*23.2 Consent of Goldstein Golub Kessler LLP. N/A
*24.1 Power of Attorney (included on signature page) N/A
-----------------------
*Filed herewith.
**To be filed by amendment.
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (No. 33-49270) declared effective on September 16, 1992 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1995 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 2000 and incorporated herein by reference.
(5) Filed as an exhibit to Schedule 13D filed on behalf of Edward J. Fred
on October 19, 2001 and incorporated herein by reference.
(6) Filed as an exhibit to Schedule 13D filed on behalf of Arthur August
on October 19, 2001 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for September 30, 2001 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K for
January 22, 2002, as amended, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K for
June 27, 2002.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1992 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K for
April 29, 1994, as amended, and incorporated herein by reference.
vi
ITEM 28. Undertakings
The Company will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" Table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1) or (4), or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that the offering of the securities at that time as the initial bona fide
offering of those securities.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under Securities Act may
be permitted to directors, officers and controlling persons of Registrant
pursuant to the provisions of its Articles of Incorporation, its By-Laws, or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by
Registrant for expenses incurred or paid by an officer, director or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
vii
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, hereunto duly
authorized, in Edgewood, New York on December 13, 2002.
CPI AEROSTRUCTURES, INC.
By /s/ Arthur August
----------------------------------------
Arthur August
Chairman of the Board and Chief Financial Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Arthur August or Edward J. Fred his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments and any subsequent registration statement
filed by the company pursuant to Rule 462(b) of the Securities Act of 1933, and
to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Commission, granting unto said attorney-in-fact and agent,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratifies and
confirms all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
/s/ Arthur August Chairman of the Board and December 13, 2002
--------------------- Chief Executive Officer
Arthur August (Principal Executive Officer)
/s/ Edward J. Fred President and Chief Financial December 13, 2002
--------------------- Officer, Secretary (Principal
Edward J. Fred Accouting Officer) and Director
/s/ Walter Paulick Director December 13, 2002
---------------------
Walter Paulick
/s/ Kenneth McSweeney Director December 13, 2002
---------------------
Kenneth McSweeney
viii
Table of Exhibits
Exhibit Number Name of Exhibit No. in Document
-------------- --------------- ---------------
*1.1 Form of Underwriting Agreement N/A
3.1 Certificate of Incorporation of the Company, as amended. (1) 3.1
3.1(a) Certificate of Amendment of Certificate of Incorporation filed on July 14, 1998. (2) 3.1(a)
3.2 Amended and Restated By-Laws of the Company. (1) 3.2
*4.7 Form of Warrant issued to Representative N/A
**5.1 Opinion of Graubard Miller N/A
10.1 1992 Stock Option Plan. (1) 10.3
10.2 1995 Employee Stock Option Plan. (3) 10.4
10.3 Form of military contract. (1) 10.7
10.4 Asset Purchase Agreement, dated September 9, 1997 by and among Kolar Machine, Inc., a 10.19
New York corporation, Daniel Liquori, the Company and Kolar, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company. (5)
10.5 1998 Performance Equity Plan. (2) 10.28
10.6 Performance Equity Plan 2000. (4) 10.29
10.7 Stock Option Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.35
(5)
10.8 Stock Option Agreement, dated August 14, 2001, between Arthur August and the Company. 10.36
(6)
10.9 Employment Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.37
(7)
10.10 Employment Agreement, dated August 14, 2001, between Arthur August and the Company. (7) 10.38
10.11 Peaceful Possession Agreement, by and among Kolar, Inc., JP Morgan Chase Bank f/k/a/ 10.38
the Chase Manhattan Bank and JP Morgan Leasing, Inc., dated January 24, 2002 (without
schedule). (8)
10.12 Auction Sale Agreement, among Daley-Hodkin Corporation, Kolar, Inc., JP Morgan Chase 10.40
and JP Morgan Leasing, Inc., dated January 10, 2002. (8)
10.13 Amended and Restated Credit Agreement, among the Borrowers, the Lenders and JP Morgan, 10.43
dated June 25, 2002. (9)
i
Exhibit Number Name of Exhibit No. in Document
-------------- --------------- ---------------
10.14 Form of Replacement Term Note, between Kolar and JP Morgan, dated June 25, 2002. (9) 10.44
10.15 Tranche C Intercreditor and Subordination Agreement, among the Lenders, the Borrowers 10.45
and JP Morgan, dated June 25, 2002. (9)
10.16 Tranche C Term Note, among the Borrowers and JP Morgan, dated June 25, 2002. (9) 10.46
10.17 Amendment to Intercreditor and Subordination Agreement, among the Subordinated Lenders 10.47
(as therein defined), the Borrowers and JP Morgan, dated June 25, 2002. (9)
10.18 Amendment to Guarantee and Collateral Agreement among the Borrowers and JP Morgan, 10.48
dated June 25, 2002. (9)
10.19 Tranche C Mortgage, Fixture Filing and Assignment of Leases and Rents, between Kolar 10.49
and JPMorgan, dated June 25, 2002. (9)
10.20 Amendment to Security Agreement, between the Borrowers and Ralok, dated June 25, 2002. 10.50
(9)
10.21 Amended and Restated Seller Note, between the Borrowers and Ralok, dated June 25, 10.51
2002. (9)
10.22 CPI Seller Guaranty Amendment, among CPI and Ralok, dated June 25, 2002. (9) 10.52
10.23 Seller Mortgage Subordination Agreement, between Ralok and JPMorgan, dated June 25, 10.53
2002. (9)
10.24 Mortgage Modification Agreement, between Kolar and JPMorgan, dated June 25, 2002. (9) 10.54
*10.25 Agreement among Ralok, Inc., the Company and Green & Selfler, as Escrow Agent, dated 10.25
November 26, 2002, regarding right to purchase note.
*10.26 Form of Merger & Acquisition Agreement, between the Representative and the Company. N/A
*10.27 Registration Rights Agreement, between the Registrant and GECapital CFE, Inc. dated N/A
February 26, 2002.
*10.27.1 Schedule of Omitted Document in the form of Exhibit
10.27, including material detail in N/A which such
document differs from Exhibit 10.27.
*10.28 Letter Agreement Amending Employment Agreement, between Edward J. Fred and the Company, N/A
dated December 12, 2002.
*21.1 Subsidiaries of the Registrant. N/A
23.1 Consent of Graubard Miller (included as part of its opinion). N/A
*23.2 Consent of Goldstein Golub Kessler LLP. N/A
ii
Exhibit Number Name of Exhibit No. in Document
-------------- --------------- ---------------
*24.1 Power of Attorney (included on signature page) N/A
-----------------------
*Filed herewith.
**To be filed by amendment.
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (No. 33-49270) declared effective on September 16, 1992 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1995 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 2000 and incorporated herein by reference.
(5) Filed as an exhibit to Schedule 13D filed on behalf of Edward J. Fred
on October 19, 2001 and incorporated herein by reference.
(6) Filed as an exhibit to Schedule 13D filed on behalf of Arthur August
on October 19, 2001 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for September 30, 2001 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K for
January 22, 2002, as amended, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K for
June 27, 2002.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1992 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K for
April 29, 1994, as amended, and incorporated herein by reference.
iii